An appraisal gap is when the home appraises for less than the purchase price. Your options are: renegotiate the price with the seller, pay the difference out of pocket, or walk away. An appraisal gap clause in your offer can protect you by capping how much above appraised value you will pay.
What Happens When the Appraisal Comes in Low
The lender will only lend based on the appraised value, not the purchase price. If the home appraises for $280K but your offer is $300K, you have a $20K gap. You must cover that gap in cash or renegotiate. The seller may agree to lower the price to the appraised value, split the difference, or hold firm. If no agreement is reached, you can walk away if you have an appraisal contingency.
How to Protect Yourself with an Appraisal Gap Clause
In a competitive market, you may waive the appraisal contingency to make your offer stronger. But you can use an appraisal gap clause instead: I will pay up to $X above appraised value. For example: I will pay up to $5K above appraisal. If the gap is $20K, you can walk away because the gap exceeds your clause. This protects you while still making your offer competitive.