Considering appraisal gap coverage in your purchase offer can strengthen your bid in competitive markets where homes often appraise below sale prices. An appraisal gap clause ensures you’ll cover part or all of the difference, reducing risk for sellers. This clause is especially useful in bidding wars but requires careful budgeting. Learn when to use it, how to structure it smartly, and what alternatives exist to balance risk and opportunity in today’s real estate landscape.
What Is an Appraisal Gap Clause?
An appraisal gap clause is a condition in your home purchase offer that says:
If the home appraises for less than the agreed-upon purchase price, the buyer agrees to pay the difference—either fully or up to a specific amount—in cash.
Why This Clause Exists
Mortgage lenders typically only finance up to the appraised value of the property, not the purchase price. If your offer is $400,000 but the home only appraises for $380,000, the lender will base your loan on the lower number. That $20,000 “appraisal gap” becomes your responsibility to cover—unless you renegotiate or back out.
An appraisal gap clause removes the guesswork for sellers and reassures them you’re serious—even if the appraisal comes in low.
Why Appraisal Gaps Happen (And Why They’re Common)
Appraisal gaps typically occur in hot markets where:
- Demand outpaces supply
- Homes receive multiple offers
- Bidding wars push prices higher than recent comps
According to CoreLogic’s 2024 Market Analysis, nearly 19% of U.S. purchase transactions involved an appraisal lower than the contract price in competitive metros like Phoenix, Dallas, and Charlotte.
Common Causes:
- Outdated comparable sales (“comps”) used in appraisals
- Overaggressive bidding in hot neighborhoods
- Sellers listing below market value to attract offers
Real-Life Example of an Appraisal Gap
Let’s say you offer $425,000 on a house listed for $410,000. After a bidding war, the seller accepts your offer. But the appraisal comes back at $400,000.
- Purchase Price: $425,000
- Appraised Value: $400,000
- Loan (80%): $320,000 (based on appraisal)
- Required Cash to Close Without Gap Clause: You’d need to either renegotiate or walk away.
- With Appraisal Gap Clause: You agree to pay the $25,000 difference in cash (or a portion of it, depending on your clause).
When Should You Include an Appraisal Gap Clause?
Let’s look at how different buyer profiles might approach this clause:
First-Time Homebuyers
- Great for showing sellers you’re serious.
- Risky if you’re already stretching your budget.
- Tip: Limit the clause to a fixed dollar amount—e.g., “Buyer agrees to cover up to $10,000 of any appraisal shortfall.”
Real Estate Professionals
Help your clients by:
- Analyzing local appraisal trends
- Estimating the likelihood of an appraisal shortfall
- Educating them on cap strategies (e.g., “up to $15,000”)
How to Structure an Appraisal Gap Clause
A typical clause might read:
Variations:
- Fixed Amount: “Buyer will pay up to $10,000 over appraised value.”
- Percentage Based: “Buyer agrees to cover up to 5% of the purchase price.”
- Full Coverage: “Buyer will pay the full difference between appraisal and purchase price.”
Pro Tip:
Always include a cap. Never agree to unlimited exposure unless you’re fully prepared to cover it.
Comparing Offer Types
Type of Offer |
Appraised Value |
Offer Price |
Gap Clause? |
Outcome |
| Traditional Offer | $390,000 | $400,000 | ❌ No | Renegotiate or walk away |
| Offer With Capped Gap Clause | $390,000 | $400,000 | ✅ Up to $10,000 | Buyer covers $10,000 |
| Offer With Full Gap Clause | $380,000 | $400,000 | ✅ Full | Buyer covers full $20,000 |
Alternatives to an Appraisal Gap Clause
Don’t want to commit to a gap clause? You still have options:
- Appraisal Contingency: Keep the right to walk away or renegotiate.
- Higher Down Payment: This gives you more flexibility without adding clauses.
- Waive Appraisal (with caution): Strongest offer—but highest risk. Only use when you’re confident in the value.
- Escalation Clauses: Bid above competing offers incrementally rather than flat out.
Pros and Cons of Using an Appraisal Gap Clause
✔️ Advantages:
- Makes your offer stand out in multiple-offer scenarios
- Shows sellers you’re committed to closing
- Reduces deal fall-through risk due to low appraisal
Disadvantages:
- Increases your upfront cash requirement
- Could result in overpaying for a home
- Limits flexibility if appraisal is significantly low
Try Our Appraisal Gap Calculator
Want to estimate how much cash you’d need if your appraisal comes in low?
Use Our Free Appraisal Gap Calculator
Input your offer, appraised value, and clause cap—and see exactly what you’d pay out of pocket.
Strategic Tips From the Field
From a Buyer’s Agent:
“I’ve helped buyers win homes by using appraisal gap clauses, but I always make sure they understand the financial implications. It’s not just about winning the offer—it’s about closing the deal smartly.”
From an Investor:
“Appraisal gaps aren’t a problem if you’re looking long-term and know the value will catch up. Just don’t overextend yourself on emotion.”
Final Thoughts: Know Your Limits, Play Strategically
Including an appraisal gap clause can be a powerful tool—but only when used wisely. In today’s market, it might just be the extra nudge that gets your offer accepted. But remember: real estate is not only emotional, it’s financial.