What Happens If a Home Appraises Below the Purchase Price?

If a home appraises for less than the purchase price, it doesn’t automatically mean the sale is going to fall apart. It does mean the buyer, seller, and lender may need to rethink the numbers before the transaction can move forward.

This situation is commonly called an appraisal gap. It can be stressful, especially when you’ve already negotiated a price and started planning your move. But there are several ways to handle it.

If you’re buying or selling a home in Ann Arbor, Michigan, here’s what you need to know.

What Does It Mean When a Home Appraises Below the Purchase Price?

Let’s say you agree to buy a home for $400,000.

The lender orders an appraisal, and the appraiser determines that the home is worth $380,000.

You now have a $20,000 difference between the agreed purchase price and the appraised value.

That doesn’t necessarily mean the home is overpriced. An appraisal is an independent opinion of value based on factors such as recent comparable sales, the property itself, and current market conditions.

The lender is primarily concerned with the value of the property because the home serves as collateral for the mortgage.

So the question becomes:

Who is going to make up the $20,000 difference?

That depends on the purchase contract, the financing, the buyer’s available funds, and what the buyer and seller are willing to negotiate.

Understanding what happens when an appraisal comes in below the purchase price can help you respond calmly instead of assuming the transaction is automatically in trouble.

Why Do Appraisals Come in Low?

There are several reasons an appraisal can come in below the purchase price.

There aren’t enough comparable sales

Appraisers generally look at recent sales of similar homes.

If there haven’t been many comparable properties sold recently, it can be harder to support a higher purchase price.

This can happen in neighborhoods with unique homes or properties that don’t closely resemble nearby sales.

Home prices have moved quickly

Sometimes buyers are willing to pay more than recent comparable sales suggest because the market is competitive.

If prices have increased quickly, the most recent closed sales may not fully reflect what buyers are currently willing to pay.

The home has features that are difficult to compare

A home may have a finished basement, extensive updates, a large lot, or other features that make it different from nearby properties.

Those features may add value, but the appraiser still needs to support the valuation using available market data.

The buyer offered more than the asking price

In a multiple-offer situation, a buyer may decide that paying above asking is worth it to win the home.

That can create a gap if the final purchase price moves beyond what the comparable sales support.

What Happens to the Mortgage?

This is where a low appraisal can become a real issue.

A lender generally bases the loan on the appraised value and the terms of the mortgage, not simply on the price the buyer and seller agreed upon.

For example, imagine:

• Purchase price: $400,000

• Appraised value: $380,000

• Buyer plans to make a 20% down payment

If the lender calculates the loan using the lower value, the buyer may need to bring additional money to closing to cover the difference.

The exact calculation depends on the buyer's loan program and lender.

That’s why buyers should talk with their lender as soon as they learn the appraisal came in low. It also helps to compare mortgage options and understand how your loan numbers work before you get too far into the buying process.

What Can a Buyer Do?

A low appraisal doesn’t leave the buyer with only one choice.

Here are some common options.

1. Ask the seller to lower the price

The buyer can ask the seller to reduce the purchase price to match the appraised value.

Using the example above, the buyer might ask the seller to reduce the price from $400,000 to $380,000.

Whether the seller agrees depends on the circumstances.

A seller who has other interested buyers may have less reason to reduce the price. A seller who wants to keep the transaction together may be more willing to negotiate.

2. Split the appraisal gap

The buyer and seller may agree to share some or all of the difference.

For example, the seller could reduce the price by $10,000 while the buyer brings an additional $10,000 to closing.

There are many possible arrangements, and the terms should be reviewed with the appropriate real estate and lending professionals.

3. The buyer can bring additional cash

If the buyer believes the home is worth the agreed purchase price and has enough funds available, they may choose to cover some or all of the difference.

This is a personal financial decision.

A buyer should think carefully about how much cash they want to put into the property above the appraised value.

4. Challenge the appraisal

Sometimes there may be information the appraiser didn't have or didn't consider.

The buyer or lender may be able to request a reconsideration of value, depending on the circumstances and lender procedures.

This might involve providing additional comparable sales or pointing out relevant property features.

The goal isn't simply to ask for a higher number. There needs to be supporting information.

5. Review the contract

The purchase agreement matters.

Depending on the contract and the circumstances, the buyer may have rights related to an appraisal contingency.

This is one reason it's so important to understand the terms of your purchase agreement before making an offer.

What Can a Seller Do?

A low appraisal can be frustrating for a seller, particularly if the home received multiple offers.

But the seller has options, too.

The first step is usually to understand why the appraisal came in below the purchase price. If you're selling a home, it can also help to understand what an appraisal looks at during the selling process so you know what information may influence the appraiser's opinion of value.

If the buyer has financing, the lender may have specific procedures for addressing the appraisal.

The seller can then decide whether to:

• Reduce the purchase price

• Agree to split the difference

• Make another negotiated adjustment

• Ask the buyer to cover some of the gap

• Hold firm on the original price

• Consider the possibility of the buyer walking away, depending on the contract

There isn't one answer that works for every transaction.

The best decision depends on the market, the property, the contract, the buyer's financing, and the seller's goals.

A Real-World Example

Imagine a buyer finds a home they really want in Ann Arbor.

The home is listed at $375,000, and after a competitive offer situation, the buyer agrees to purchase it for $400,000.

Everyone is excited.

Then the appraisal comes back at $390,000.

Now there's a $10,000 appraisal gap.

The buyer could decide to bring additional money to closing.

The seller could agree to reduce the price.

They could meet somewhere in the middle.

Or, if the contract allows it, the buyer could reconsider the transaction.

The important point is that the appraisal doesn't automatically determine whether the transaction closes.

It changes the conversation.

What Should You Do If Your Appraisal Comes in Low?

If you're the buyer, don't panic.

Start by asking your lender and real estate agent exactly what the low appraisal means for your financing and your contract.

Then look at the numbers.

Ask yourself:

• How much additional cash would I need?

• Am I comfortable paying more than the appraised value?

• How badly do I want this particular home?

• Are there other homes available that meet my needs?

• Does the appraisal appear to overlook relevant comparable sales or property features?

If you're the seller, take a similar approach.

Before agreeing to a price reduction, understand the appraisal and the alternatives available to you.

A good conversation about the numbers can prevent an emotional decision.

Common Mistakes to Avoid

Assuming the deal is automatically dead

A low appraisal is a problem to work through, not necessarily the end of the transaction.

Making a decision before understanding the contract

Your purchase agreement may contain specific provisions that affect what happens after a low appraisal.

Treating the appraisal as an exact statement of what the home is worth

An appraisal is an opinion of value based on the information and methodology available to the appraiser.

Market value can be influenced by buyer demand, property condition, location, timing, and other factors.

Ignoring the lender

Buyers should understand how the appraisal affects their loan before deciding how much additional money they may need.

Getting emotional about the difference

A $10,000 or $20,000 gap can feel enormous.

But the right decision comes from looking at the entire transaction, not just the size of the gap.

What Happens If the Buyer and Seller Can't Agree?

If the buyer and seller can't reach an agreement, the next step depends heavily on the purchase contract.

The buyer may have the right to terminate under certain circumstances, or the seller may decide not to make concessions.

The exact outcome varies from transaction to transaction.

It's also important to understand when a problem may be serious enough to reconsider the purchase. A low appraisal is one issue, but buyers should look at the entire financial and contractual picture before deciding whether to continue.

This is where having an experienced Realtor® and a responsive lender can make a big difference. You want people who can explain your options clearly and help you understand the financial consequences before you make a decision.

Frequently Asked Questions

Can a home appraise for less than the purchase price?

Yes. An appraisal can come in below the agreed purchase price. This creates an appraisal gap that the buyer and seller may need to address.

Does a low appraisal mean the seller has to lower the price?

No. A seller isn't automatically required to reduce the price simply because the appraisal is lower. Whether a price adjustment makes sense depends on the contract and negotiations.

Can a buyer still buy a home if it appraises low?

Yes, in many cases. The buyer may be able to bring additional cash, negotiate a lower price, split the difference, or pursue another solution depending on the loan and contract.

Can you challenge a low appraisal?

There may be a process for requesting a reconsideration of value. The lender can explain what information is required and whether the appraisal can be reviewed.

Who pays the appraisal gap?

There isn't one automatic answer. The buyer, seller, or both may contribute depending on the negotiation and the terms of the transaction.

Should I walk away from a home with a low appraisal?

Not necessarily. The right decision depends on the size of the gap, your financing, your budget, the home itself, and your contract. It's worth reviewing all of those factors before deciding.

The Bottom Line

If a home appraises below the purchase price, the sale doesn't automatically fall apart.

You have to look at the numbers and understand what the appraisal means for the buyer's financing and the terms of the contract.

Sometimes the seller adjusts the price. Sometimes the buyer covers the difference. Sometimes the two sides split the gap. And sometimes the parties can't reach an agreement.

If you're buying or selling a home in Ann Arbor, having someone walk through the numbers with you can make a stressful situation much easier to understand.

Nancy Arnold is a Realtor® with The Charles Reinhart Company serving Ann Arbor, Michigan. She helps buyers and sellers understand the local real estate process and make informed decisions about their next move.

About the Author

Nancy Arnold, Realtor®
The Charles Reinhart Company
2275 W. Stadium
Ann Arbor, MI 48103
[email protected]
734-260-3505