Key Takeaways
What an Appraisal Is — and Why Lenders Require It
When you apply for a mortgage, your lender is effectively making a secured loan using the property itself as collateral. Before committing that money, the lender needs an independent answer to a specific question: what is this home actually worth on the open market today? That answer comes from a licensed or certified appraiser, and it shapes nearly every financing decision that follows.
An appraisal is a formal opinion of market value prepared by a credentialed professional who is required by federal regulations to be independent from the transaction. The lender — not the buyer or the seller — selects and orders the appraiser, typically through an appraisal management company. Even so, the buyer generally pays the appraisal fee at or before closing, often in the range of a few hundred dollars depending on property type and location.
The appraiser visits the home, documents its condition, size, features, and any significant deficiencies, then compares it against recently sold properties of similar size and type in the same market area. These comparable sales, widely called comps, anchor the valuation. The resulting appraisal report is submitted to the lender and becomes a key underwriting document. Understanding this process is foundational — see our guide to what mortgage pre-approval actually means for context on where appraisals fit in the broader financing timeline.
What you will need
How the Appraisal Determines Your Loan Amount
Lenders calculate your maximum loan against the lower of the purchase price or the appraised value. If the home is under contract for $420,000 but appraises at $400,000, the lender treats $400,000 as the baseline. A buyer with a 10% down payment commitment would be approved for a loan of up to $360,000 — not the $378,000 they expected. The resulting $18,000 gap must be covered somehow, or the deal is at risk.
Confirm the appraisal has been ordered
After your purchase agreement is executed and your loan application submitted, ask your loan officer to confirm when the appraisal has been ordered. Lenders are required to provide you with a copy of the completed appraisal at least three business days before closing. Track this timeline proactively — delays in the appraisal can push your closing date.
Prepare the property for the inspection visit
If you are the seller, ensure the property is accessible and presentable on the day of the appraiser's visit. Completed repairs should be finished, not in progress. Appraisers note deferred maintenance and condition issues, which can reduce the concluded value. If you are the buyer, you typically will not attend the appraisal, but you can ask your agent to provide the appraiser with a list of recent upgrades or permitted improvements.
Review the completed appraisal report carefully
When you receive the appraisal report, read it in full. Check the comparable sales used: are they truly similar in size, condition, and proximity? Verify that the property's square footage, bedroom and bathroom count, and notable features are accurately recorded. Errors in basic facts are not uncommon and can meaningfully affect the outcome.
Request a reconsideration of value if warranted
If you believe the appraisal contains factual errors or omitted relevant comparable sales, you have the right to submit a formal reconsideration of value (ROV) request through your lender. Compile documentation: specific comparable sales that closed recently and are more similar to the subject property than those used, any corrections to factual errors, and a clear written explanation of your reasoning. The lender forwards this to the appraiser for review.
Negotiate with the seller or evaluate your alternatives
If the ROV does not change the appraised value, move to negotiation. Present the appraisal to the seller and request a price reduction to the appraised value. If the seller declines or only partially concedes, assess whether you can cover the gap with additional cash, whether your contract contingency allows you to exit, or whether a second appraisal ordered by a different lender is a realistic path. Document all communications in writing.
When the Appraisal Comes in Low: Your Real Options
A low appraisal doesn't mean an automatic dead end, but it does require a deliberate response. Skipping this step or hoping the issue resolves itself is one of the patterns described in our analysis of why homebuyers lose deals.
Know Your Contingency Before You Need It
Review your appraisal contingency clause with your agent before an issue arises — not after you receive a low report. Understanding your deadlines and notification requirements in advance gives you more time to respond strategically rather than reactively.
The four main paths available after a low appraisal are negotiation, a buyer cash contribution, a formal dispute, or contract termination. Each carries trade-offs. Negotiating a price reduction is the most common resolution when a seller is motivated. Paying the gap in cash preserves the deal but increases your out-of-pocket cost at closing. Formally disputing the value — called a reconsideration of value (ROV) — is worth pursuing when you can identify genuine errors in the appraisal or locate comparable sales the appraiser did not consider. Finally, if your purchase agreement includes an appraisal contingency, you can walk away and recover your earnest money deposit. Consult with a licensed real estate attorney or your agent to understand your specific contract rights before making any decision.
Understanding Appraisal Contingencies
An appraisal contingency is a clause in a purchase contract that gives the buyer the right to renegotiate or exit the deal without penalty if the home appraises below the agreed price. In competitive markets, some buyers waive this contingency to make their offer more attractive — a decision that carries meaningful financial risk. Without a contingency, a buyer who cannot cover an appraisal gap is still legally obligated to complete the purchase or risk losing their earnest money deposit.
Whether to include or waive an appraisal contingency is a financial and strategic decision that depends on the buyer's cash reserves, risk tolerance, and the competitiveness of the local market. This is the kind of choice best made in consultation with your real estate agent and, where appropriate, a financial adviser. For a broader look at costs that follow closing, our overview of annual homeownership costs is worth reviewing before you finalize your budget.
This article is for informational purposes only and does not constitute legal, financial, or real estate advice. Consult a licensed professional for guidance specific to your situation and jurisdiction.