Module 8 · Lesson 8
Appraisal Contingencies
Explains how an appraisal contingency protects buyers if the home appraises for less than the agreed purchase price.
6 min read
What you'll learn
- What an appraisal contingency protects against
- How it interacts with the financing contingency
- What options exist if the appraisal comes in low
- Why some buyers waive this contingency
An appraisal contingency is a contract clause that protects a buyer if the professional appraisal, ordered by the lender, values the home for less than the agreed purchase price.
Why the Appraisal Matters to Financing
When a buyer finances a purchase with a mortgage, the lender orders an independent appraisal to confirm the home is worth roughly what is being paid for it. Lenders generally base the loan amount on the lower of the purchase price or the appraised value, since the home serves as collateral for the loan. If the appraisal comes in below the purchase price, the lender may not be willing to lend as much as originally planned.
What Happens If the Appraisal Is Low
If the appraisal comes in below the purchase price, buyers typically have a few possible paths: asking the seller to lower the price to match the appraisal, paying the difference between the appraised value and the purchase price out of pocket in cash, splitting the gap with the seller, challenging the appraisal if there is a reasonable basis to do so, or canceling the contract under the appraisal contingency.
Relationship With the Financing Contingency
The appraisal contingency and financing contingency are related but not identical. Financing contingencies cover the broader mortgage approval process, while the appraisal contingency specifically addresses what happens if the property's appraised value falls short. Some contracts combine these into one financing and appraisal clause, while others separate them; buyers should read their specific contract carefully.
Why Some Buyers Waive It
In competitive markets, buyers sometimes waive the appraisal contingency, or agree in advance to cover any appraisal gap up to a certain amount, to make their offer more attractive to sellers who want certainty the deal will close even if the appraisal comes in low.
Appraisal Gap Coverage as a Middle Ground
Some buyers offer to cover a limited, specified amount of appraisal gap rather than waiving the contingency entirely. This shows sellers a degree of commitment while still capping the buyer's financial exposure if the appraisal comes in significantly lower than expected.
The appraisal contingency is an important safeguard tying the purchase price to an independent, professional opinion of value, and understanding how it works helps buyers negotiate confidently if a low appraisal occurs.
Key takeaways
- An appraisal contingency lets a buyer respond if the home's appraised value is below the purchase price.
- Lenders generally will not loan more than a property's appraised value supports.
- Options after a low appraisal include renegotiating, paying the gap, or canceling.
- Waiving this contingency shifts the risk of a low appraisal fully onto the buyer.
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Educational content only — not financial, legal, or tax advice. Verify details with a licensed professional for your situation.