Your mortgage down payment is based on whichever is lower, the appraisal or the purchase price. Lenders apply your down payment percentage to that smaller number, so if the appraisal comes in above the contract price, nothing changes for you at closing; if it comes in below, you have to cover the shortfall in cash on top of your planned down payment.
The “Lower Of” Rule Behind Every Mortgage
Every lender calculates the loan-to-value ratio by dividing the loan amount by the property value, and for a purchase, the Fannie Mae Selling Guide defines “property value” as the lower of the sales price or the current appraised value.1Fannie Mae. Loan-to-Value (LTV) Ratios FHA and VA loans follow the same principle. The home is the collateral, so a lender will not lend a percentage of a number the appraisal does not support.
The percentage itself depends on your loan program. A conventional loan with 20% down puts you at 80% LTV. Fannie Mae’s HomeReady program allows as little as 3% down, taking LTV up to 97%.2Fannie Mae. 97% Loan to Value Options FHA loans require a minimum 3.5% down for borrowers with a credit score of 580 or higher. VA-backed purchase loans often require nothing down, as long as the sales price does not exceed the appraised value.3U.S. Department of Veterans Affairs. Purchase Loan Whatever the program, the percentage attaches to the smaller of the two numbers.
When the Appraisal Comes In Above the Price
A high appraisal is good news that does not touch your down payment. If you agree to buy at $300,000 and the appraisal comes in at $320,000, the lender still uses $300,000 to size the loan.1Fannie Mae. Loan-to-Value (LTV) Ratios An FHA loan at 3.5% down still needs $10,500 at the table. The higher appraisal cannot substitute for cash.
What it gives you is $20,000 in equity the moment you close. That equity has no effect on the closing statement, but it helps if you refinance later, apply for a home equity line, or see prices soften. Buying below appraised value is a strong position, even if it feels like it should save you money upfront.
When the Appraisal Comes In Below the Price
This is where the “lower of” rule costs real money. The lender sizes the loan against the appraised value, and you owe the seller the full contract price. The distance between the two is called the appraisal gap, and it comes out of your pocket in addition to your planned down payment.
Consider the math. You agree to pay $400,000 and plan to put 10% down. You expect to bring $40,000 and borrow $360,000. The appraisal comes back at $380,000. The lender now caps your loan at 90% of $380,000, or $342,000. You still owe the seller $400,000, so you need $58,000 in cash: $38,000 as the down payment on the appraised value, plus the $20,000 gap. That is $18,000 more than you planned.
The gap has to come from documented funds. The lender will not roll it into the loan, because doing so would push LTV past the program limit against the appraised value. Many buyers do not have an extra $10,000 or $20,000 sitting in reserve, which is why a low appraisal can sink an otherwise workable deal.
The PMI Surprise
A low appraisal can also drag you into private mortgage insurance you thought you had avoided. Say you planned to put 20% down on a $450,000 home to sit exactly at 80% LTV and skip PMI. If the appraisal comes back at $430,000 and you proceed at the original price, your $90,000 down payment is now roughly 84% LTV against the lower value. That crosses the 80% threshold, and the lender will require PMI until you build enough equity to drop back below it.
Ways to Handle a Low Appraisal
A low appraisal forces a decision, not necessarily a cancellation. The common paths:
- Renegotiate the price. Ask the seller to drop to the appraised value. In a buyer’s market, sellers often agree because the next buyer’s lender will land in the same place. In a seller’s market, expect resistance.
- Cover the gap with your own funds. If you have the savings, you pay the difference in cash on top of the down payment. The lender will verify the money with bank statements.
- Use gift funds. Fannie Mae allows gift funds from family members to cover all or part of the down payment and closing costs on a primary residence, and for a one-unit home, the entire down payment can come from a gift with no contribution required from you. The donor cannot be the seller, builder, agent, or anyone else involved in the transaction. FHA and VA loans have their own gift rules.4Fannie Mae. Personal Gifts
- Split the difference. The seller drops the price by part of the gap and you bring cash for the rest. Nothing forces an all-or-nothing outcome.
- Walk away. If your contract has an appraisal contingency or an FHA/VA clause, you can cancel and recover your earnest money.
Appraisal Gap Coverage Clauses
In competitive markets, buyers sometimes commit up front to cover a gap up to a set dollar amount. You might agree to cover up to $15,000. If the appraisal comes in $10,000 low, you pay $10,000. If it comes in $25,000 low, you owe $15,000 and can renegotiate or walk for the remaining $10,000. A cap limits your exposure while making the offer stronger than one with a full appraisal contingency.
Contract Protections Against a Low Appraisal
An appraisal contingency lets you cancel the contract and keep your earnest money if the home appraises below a threshold you set. Without it, you are bound to buy at the agreed price no matter what the appraisal says, and if you cannot cover the gap, you risk breaching the contract and losing your deposit. Some buyers waive the contingency to win competitive bids. That is a calculated gamble, because it hands you the full financial risk of a low appraisal.
The FHA Amendatory Clause
FHA loans require an amendatory clause in the purchase contract stating that the buyer is not obligated to complete the purchase or forfeit earnest money if the appraised value comes in below the sales price.5U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook You can renegotiate, cover the gap, or walk with your deposit. The clause is mandatory unless the buyer receives the appraised value statement before signing.
The VA Escape Clause
VA purchase loans must include an escape clause in every contract. If the property’s appraised reasonable value is lower than the purchase price, the veteran can negotiate a lower price, cover the difference with personal funds, or exit the transaction without losing earnest money.6U.S. Department of Veterans Affairs. VA Escape Clause Because VA loans typically require nothing down, an appraisal gap would otherwise force a veteran to bring cash to a zero-down deal.
Challenging an Appraisal You Believe Is Wrong
If the appraisal looks off, you can ask the lender to start a reconsideration of value (ROV). This is a formal process, not a complaint, and it needs evidence.7Consumer Financial Protection Bureau. Mortgage Borrowers Can Challenge Inaccurate Appraisals Through the Reconsideration of Value Process Useful evidence includes comparable sales the appraiser did not consider, property features that were reported incorrectly, or outright errors in the report. Federal interagency guidance directs lenders to establish clear ROV processes and to inform borrowers early enough for corrections to matter before the final credit decision.8Federal Register. Interagency Guidance on Reconsiderations of Value of Residential Real Estate Valuations
There is no standardized federal ROV form and no required minimum number of comps. Each lender runs its own process, so ask your loan officer exactly what to submit. Strong ROVs point to specific, verifiable errors: a nearby comparable sale the appraiser missed, a square footage mistake, a renovation that went unrecorded. Vague objections do not move the number.
Getting a Copy of the Appraisal
Your lender must give you a free copy of the appraisal. Under the Equal Credit Opportunity Act’s implementing regulation, delivery is required promptly upon completion or at least three business days before closing, whichever comes first.9eCFR. 12 CFR 1002.14 – Rules on Providing Appraisals and Other Valuations You can waive the timing and take the copy at or before closing, but the waiver itself has to be signed at least three business days before closing.
The lender must also tell you within three business days of your loan application that you have the right to a copy, and if the loan does not close, the lender still has to send the appraisal within 30 days of that decision. Read it as soon as it arrives. That is your window to catch mistakes and start an ROV before the closing timeline runs out.