Could an Appraisal Gap Clause Make Your Home Offer Stand Out?

If your offers aren't being accepted, this could make a big difference.

Home buyers have been facing tough conditions for months, as the supply of homes has been very tight and prices have skyrocketed in many parts of the country. While there are some signs home prices could be on a downward trajectory, right now it is still a seller's market in many places. That means buyers may still face challenges in getting an approved offer.

If you are having a hard time getting a seller to accept offers that you are making to purchase properties, you may want to consider an appraisal gap clause to stand out from others and give yourself a leg up.

What is an appraisal gap clause?

An appraisal gap clause is included in an offer to buy a home. Essentially, if you include an appraisal gap clause, you offer to cover the difference between what you were willing to pay for the house and the amount the house appraised for.

For example, say you offered to buy a home for $250,000 but the house appraised for $200,000. If you included an appraisal gap clause, you indicated you would be willing to come up with an extra $50,000.

Because there could sometimes be a big gap between what a home appraises for and the amount you have offered for it -- especially in competitive markets -- you may want to include a limit if you include an appraisal gap clause. For example, you could offer to cover up to $20,000 extra on the home if it doesn't appraise for as much as you agreed to buy it for.

Why would an appraisal gap clause be helpful?

An appraisal gap clause is helpful because a low appraisal can impact your ability to get a mortgage.

Mortgage lenders require appraisals because they want to make sure the home's market value is high enough to guarantee the mortgage loan. Mortgages are secured debt with the house acting as collateral, and if the house isn't worth as much as you paid for it, then the bank might not be able to sell it for enough to recover its costs if they had to foreclose.

Since lenders require the home to appraise for a certain amount, home sales can fall apart because of a low appraisal. Sellers don't want to take the chance of taking the home off the market only for the deal to fall through if a buyer cannot get financing. An appraisal gap clause helps to reassure them that won't happen.

Should you include an appraisal gap clause?

An appraisal gap clause can undoubtedly make a seller more likely to accept an offer. But if you include one, you could end up having to spend tens of thousands of dollars extra on the home. And you would be paying more for the property than an expert says the house is worth.

You'll need to think carefully about whether you are willing to do that. If you believe the house is worth the maximum amount you'd pay for it (even after covering the appraisal gap) or if you think property values will rise quickly and you really want to get into a house, then including an appraisal gap clause just may be your best move.