What is an appraisal gap, and how do I cover one if the home appraises low?

An appraisal gap is the difference between your accepted offer price and a lower appraised value. Lenders lend based on the lower of price or appraisal, so if a $500,000 home appraises at $480,000, the lender bases your loan on $480,000 and you must cover the $20,000 gap in cash on top of your down payment. Options include paying the difference out of pocket, renegotiating the price with the seller, disputing the appraisal with additional comps, or walking away if you have an appraisal contingency. In hot markets, some buyers add an appraisal gap coverage clause promising to pay up to a set amount. Keep extra reserves beyond your planned down payment to handle this risk.