Appraisal Gap Coverage: What It Is and Who Typically Pays It

Winning a bidding war on a home is exciting, but offering a high purchase price introduces a new hurdle. The lender will only base the mortgage on the home's appraised value. If the appraisal comes back lower than your offer, you have to bridge that financial difference before you can close.

Understanding the Appraisal Gap

An appraisal gap is the exact difference between a home's appraised value and its agreed purchase price. If there is a gap and no coverage clause in place, the buyer typically needs to increase their down payment or renegotiate the deal. If the buyer can't bring more cash and the seller refuses to lower the price, the transaction can fall apart.

How Coverage Clauses Work

An appraisal gap coverage clause is a tool used to keep deals together. In this clause, the buyer agrees in the purchase contract to fund some or all of the difference out of pocket if the appraisal comes in low. Buyers can cap their coverage at a specific dollar amount or percentage in the contract. For example, a buyer might agree to cover up to $20,000, meaning they only pay out of pocket up to that limit.

Combining Clauses for Protection

Buyers don't have to write a blank check to win a house. A gap coverage clause can be combined with a standard appraisal contingency. This gives the buyer a defined financial limit plus the right to walk away penalty-free if the gap exceeds their agreed cap.

A Loan Officer at our Mortgage Brokerage can help you review your cash reserves before you write an offer. We make sure you know exactly how an appraisal gap will affect your final numbers.

Expect to close one week early.

Frequently Asked Questions

What happens if the appraisal comes in under the purchase price?

The buyer must increase their down payment to cover the difference, renegotiate the price with the seller, or walk away if they have an appraisal contingency.

What is an appraisal gap coverage clause?

It is a clause in the purchase contract where the buyer agrees upfront to cover the difference between the purchase price and a low appraisal out of pocket.

Can I cap how much appraisal gap I'll cover?

Yes. Buyers can write a specific cap into the contract, such as agreeing to cover a maximum of $10,000 or $20,000 of any gap.

Can I still walk away if the gap is too big?

Yes, if your gap coverage clause is combined with an appraisal contingency, you can walk away penalty-free if the gap exceeds your capped limit.