What is an appraisal gap and how do I handle it in Wisconsin?
Rob Miller explains what an appraisal gap is, how it affects Wisconsin buyers, and the strategies we use to keep deals alive when the appraisal falls short.
Rob Miller, Branch Manager at MadCity Home Loans, explains the appraisal gap — one of the trickiest situations a Wisconsin buyer can face in a hot market.
What is an appraisal gap and how do I handle it?
An appraisal gap occurs when the home you're purchasing appraises for less than the price you agreed to pay. For example: you offered $400,000, but the appraiser says the home is worth $382,000. That $18,000 difference is the appraisal gap.
Why It Matters for Your Mortgage
Your lender can only loan against the lower of the purchase price or the appraised value. So if you're putting 5% down on a $400,000 home ($20,000), and the home appraises at $382,000, your lender now calculates your loan on $382,000 — meaning your $20,000 covers less of the gap and you'd need to bring additional cash to close.
Your Options
- Cover the gap in cash: Bring additional funds to close to cover the difference between the appraised value and the purchase price. Requires strong reserves.
- Renegotiate the price: Ask the seller to reduce the price to the appraised value, or split the gap. Common in balanced markets.
- Appraisal Reconsideration of Value (ROV): If you have strong comps the appraiser missed, we can challenge the appraisal through a formal ROV process.
- Walk away: If you have an appraisal contingency in your contract, you can exit and recover your earnest money.
Appraisal Gap Coverage Clause
In competitive markets, buyers sometimes include an "appraisal gap coverage clause" in their offer — committing to cover a specified amount of any gap (e.g., "buyer will cover up to $15,000 of any appraisal gap"). This can make your offer more attractive without removing the appraisal contingency entirely.
Related Post: For agent-side strategies, read How to Save a Deal With a Low Appraisal.