Could an appraisal gap complicate a residential closing?

On Behalf of Marcus, Gould & Sussman, LLP | Sep 9, 2025 | Real Estate | Residential real estate transactions involve a degree of risk for everyone involved. The seller has to make rapid arrangements to relocate after accepting an offer. The buyers have to financially commit to a property weeks before they can occupy it and may spend three decades paying the principal balance owed for the property. The mortgage lender provides the vast majority of the capital needed to acquire the property. There are rules and special documents in place to help limit the legal and financial exposure of everyone involved in the transaction. Lenders protect themselves by requiring appraisals to ensure they don’t approve an inappropriate amount of funding for a property not worth what the buyers think or contracted for. Lenders may deny the application for the proposed loan for either “credit” issues upon updated reviews of the buyers’ ability to pay, or appraisal issues with the property. An appraisal gap is often one of the scenarios that could lead to a denial of the application for a mortgage. What causes an appraisal gap? In an appraisal gap scenario, the buyers offer too high of a price for the property. Mortgage lenders approve a maximum amount of funding based on a prospective buyer’s income, assets and credit score. Buyers generally look at properties based on the amount of financing they can secure. They may offer up to the maximum loan amount indicated in pre-approval notices. However, before the lenders actually commit to the actual loan for the specific property, validating that the property is worth that price is an important part of the process. Lenders require an appraisal to validate the price offered for the property. If prices have fluctuated recently or if buyers bid aggressively due to possible competition, an appraisal gap could be an issue. The appraiser might determine that the fair market value of the home is lower than the offered sale price. Since appraisals are based on the recent “history” and terms of “comparable” properties, sometimes the appraiser is using dated information as to the current “market” or incorrect comparable properties. It is important to review the appraisal if too low to point out more recent and “better” comparable deals to use. If the appraisal is too low, the buyers then either needs to provide their own capital to make up the difference or look into alternate means of financing the transaction. Otherwise, unless the seller agrees to reduce the sale price of the property, moving forward with the closing may not be possible. Appraisal gaps have the potential to cause a transaction to fall apart. People making offers on real property may want to integrate appropriate details into their offers and purchase agreements to protect themselves if an appraisal gap becomes an issue. Approaching real estate transactions with appropriate protections in place can take some of the risk out of making legally-binding offers on real property.