An appraisal gap occurs when a home's appraised value comes in below the price the buyer agreed to pay. Because a lender will only finance based on the lower of the sale price or appraised value, the buyer must cover the shortfall in cash if the deal is to proceed at the contract price.
Appraisal gaps are common in competitive markets where bidding wars push offers above recent comparable sales. To strengthen an offer, some buyers include an appraisal gap coverage clause, promising to pay a set amount above the appraisal out of pocket.
When a gap appears and there is no coverage clause, the parties typically renegotiate the price, the buyer pays the difference, or the buyer exercises an appraisal contingency to exit the contract.