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Appraisal gaps – when a home’s appraised value comes in below the agreed contract price – have become a common hurdle in many real estate transactions, including in Maryland. Below we dive into what happens in these situations, how buyers and sellers can prepare and respond, why appraisal gaps occur, Maryland-specific trends, negotiation strategies, loan considerations, and real-world examples. This deep dive provides up-to-date insights and Maryland market context to help you navigate appraisal gaps with confidence.
For Buyers & Sellers: Dealing with a Low Appraisal
When an Appraisal Comes in Below the Contract Price
If the appraisal values the home for less than the purchase price, a few things can happen. The lender will base the loan on the appraised value, not the contract price, leaving a “gap” that must be addressed. For example, if you agreed on a $400,000 price but the appraisal is $380,000, there’s a $20,000 shortfall – the lender will only finance based on $380K. Buyers and sellers then have four basic options:
Seller lowers the price to the appraised value. The seller might agree to drop the price to $380,000 in the example, eliminating the gap.
Buyer pays the difference in cash. The buyer can choose to bring extra cash (here, $20,000) to closing to cover the gap above the loan amount.
Meet in the middle. Buyer and seller renegotiate somewhere between the appraisal and contract price (e.g. split the difference).
Deal terminates. If no agreement is reached, either party can walk away (if a contingency is in place) and the contract becomes void.
If an appraisal contingency was in the contract, the buyer is protected – they can exit with their earnest money if the value comes in low. If the buyer waived the appraisal contingency (a tactic often used in hot markets to win bidding wars), then they are obligated to proceed or risk losing their deposit, meaning they must cover the gap or find another solution. In short, a low appraisal injects a need for negotiation or extra funds; otherwise the financing (and the deal) can fall through.
How Buyers Can Prepare for or Prevent an Appraisal Gap
Do your homework on value: Before making an offer, review recent comparable sales with your agent to ensure you’re not wildly overpaying. Understanding the home’s likely appraised value can help you avoid an unrealistic contract price in the first place. In a hot market, it’s easy to get caught up in bidding wars and offer over asking; just remember the appraisal will be based on recent sales data, not emotions. Try to keep your offer within a reasonable range of the comparables.
Include an appraisal contingency or gap clause: If you’re concerned about a low appraisal, keep the appraisal contingency in your contract for protection (this gives you the right to renegotiate or walk away if the appraisal is low). Alternatively, some buyers use an “appraisal gap guarantee” clause to make their offer more attractive in competitive situations – for example, you promise to pay up to a certain amount over a low appraisal. This can help prepare the buyer and reassure the seller that you have a plan if the appraisal comes in short. Just be sure you actually have the funds available if you’re making such a guarantee.
Have extra funds set aside: The best way to prevent an appraisal gap from derailing your purchase is to be financially prepared to cover a difference, if it arises. Sellers’ markets often expect buyers to bring extra cash. If you can, set aside some money in addition to your down payment and closing costs to use in case you need to cover a gap. Even an extra 2-5% of the purchase price in reserve can make a big difference.
Don’t waive protections lightly: In Maryland’s competitive markets, many buyers in recent years waived appraisal contingencies, essentially accepting upfront that they’d cover any shortfall. This can help win a bidding war, but only do this if you are absolutely sure you can handle the worst-case scenario. If you waive the contingency, you should either have the cash to cover a large gap or be comfortable renegotiating other aspects (or, at worst, losing your deposit). Never waive it just to “beat” other offers without a plan for a low appraisal.
Work with local experts: Using a local lender and an experienced Maryland real estate agent can help prevent surprises. Local lenders are familiar with area values and may use appraisers who know the market well. Your agent can also provide the appraiser with relevant comps (via the seller’s agent or during the appraisal appointment) – while appraisers are independent, giving them a packet of recent comparable sales and info on upgrades can sometimes ensure they don’t miss key data. This proactive approach may not prevent a low appraisal, but it can help the appraisal be as accurate as possible.
How Sellers Can Protect Their Sale and Negotiate Effectively
Price realistically and use data: The best prevention is pricing your home right from the start. In a hot Maryland market, it’s tempting to accept the highest offer, even if it’s far above the recent comps. But remember, an over-inflated contract price can lead to appraisal trouble. Review the comparable sales your agent provides when setting your listing price and when evaluating offers. A slightly lower, well-supported price that appraises is better than a sky-high offer that blows up later. If you do choose a high offer, make sure the buyer’s offer addresses appraisal (large down payment or an appraisal gap clause).
Evaluate the buyer’s financing strength: When you have multiple offers, consider how likely each buyer can handle a low appraisal. An offer that explicitly says the buyer will cover, say, “up to $10,000 of any appraisal shortfall” is a safer bet than one that doesn’t. Also, a buyer putting 20% or more down has more flexibility – if the appraisal comes in low, they might simply adjust their loan-to-value and still close (for instance, switching to a 15% down + PMI scenario). A buyer with only 3% down has little room to maneuver if the appraisal is low. Choose a well-qualified buyer who has the resources to adapt.
During negotiations – don’t panic: If you receive the dreaded news of a low appraisal, stay calm and assess your options. First, ask to see a copy of the appraisal report. Review it with your agent for inaccuracies or missing comparables. It’s possible the appraiser overlooked a recent sale or misjudged an aspect of your home. You can then work with the buyer’s agent to challenge the appraisal by providing additional comps or information (through the lender’s formal reconsideration process). While the success rate of appeals is not high, if there are clear errors, it’s worth a shot – especially if the gap is large.
Be willing to compromise: In many cases, the simplest solution is renegotiation. If you can afford to, consider meeting the buyer halfway or at least part of the way on the price. For example, if the gap is $20k, maybe you come down $10k and the buyer covers $10k. This way, both sides feel the pain (and the fairness) equally. Most transactions with appraisal gaps do end in some compromise like this – experienced agents note it’s typical for both seller and buyer to accommodate each other to keep the deal alive. Remember, if you don’t budge at all, you risk losing the buyer and having to start over. A slightly lower price may be worth closing the deal now versus uncertainty later.
Consider incentives: If dropping the price is hard to swallow, another approach is to offer a credit or incentive. For instance, you could agree to pay some of the buyer’s closing costs or give a credit for repairs, effectively putting money in the buyer’s pocket that can help cover the gap. In one real-world case, a buyer asked the seller for a $5,000 closing credit after a low appraisal, and the seller agreed. The net effect was the same as the seller reducing the price by $5k, but sometimes framing it as a credit (especially if the buyer needs help with cash flow) can make the deal work.
Leverage backup offers (carefully): If you had multiple offers or backup buyers, you might be tempted to walk away from this buyer and go to the next one. This can be viable if, for example, a cash buyer or a buyer with a bigger down payment is waiting in the wings. However, beware: if your home had an FHA appraisal, that value sticks (see Loan-Specific section) for a while. And even with a new buyer, a different appraiser might not value the home much higher unless market conditions are changing rapidly. Use backup offers as leverage in negotiation (“we have other interested buyers”), but recognize the current buyer also knows any new buyer could face the same appraisal issue. Often, this reality check motivates both sides to find a compromise now.
Negotiate appraisal contingencies in advance: Some Maryland sellers, anticipating issues, have tried to control the situation by negotiating an appraisal gap clause in the original contract. For example, you might counter an offer with a term that “buyer will pay up to $X above a low appraisal” or “if appraisal is below price, buyer and seller agree to split the difference up to $Y each.” Having this agreed upfront can protect you later. At a minimum, if a buyer wrote “offer $500k, appraisal contingency waived,” it means they’ve accepted the risk. If they wrote “offer $500k with appraisal contingency,” you knew this could happen and presumably chose that offer expecting to possibly lower the price. Always read the appraisal clause in your contract so you know your obligations.
Why Appraisal Gaps Happen
Market Factors Leading to Low Appraisals
It’s mostly Economics 101: when demand far outstrips supply, home prices can shoot up faster than the appraisal values can keep pace. In red-hot markets, buyers bid prices up based on competition and future expectations, not just past sales. An appraiser, however, looks backward at recent closed sales (comparables) to determine value. In Maryland’s seller’s markets (like we saw in 2020-2022), it was common to have multiple offers pushing a home well above asking price. Appraisers might not find support for that contract price in the recent sales data, resulting in an appraisal gap. As CoreLogic’s Chief Appraiser explains, buyers often “pay more than the market data supports,” creating an appraisal gap when the appraiser can’t justify the price with comps.
Additionally, limited housing inventory means fewer comparable sales. If only a few homes have sold recently in an area, an appraiser has a smaller dataset. When prices are rising rapidly, last quarter’s sales might be 5% lower (or more) than current negotiated prices. This is why “appraisals commonly come in low when the market is rising rapidly” – the data lags behind the market trend. In short, overheated market conditions are prime breeding ground for appraisal gaps. Maryland saw this especially in suburbs of DC and desirable neighborhoods where fierce bidding wars were the norm.
Lender Requirements and How Appraisers Determine Value
Appraisers are licensed professionals tasked with providing an unbiased opinion of value for the lender. Their job is to ensure the bank isn’t lending more than the property is truly worth (to protect the bank’s collateral). They follow strict guidelines in selecting comparable sales – usually looking at homes of similar size, type, and location that sold in the past 3-6 months. They will make adjustments for differences (beds, baths, condition, etc.) according to standardized methods. Lender requirements (and secondary market guidelines from Fannie Mae, Freddie Mac, FHA, VA, etc.) often impose additional conservatism – for example, preferring comps within a mile, sold within 90 days, etc. If the property is unusual or if the most recent sales are lower, the appraiser can’t just take the contract price at face value; they must back it up with evidence.
Moreover, lenders typically lend only a certain percentage of the appraised value (e.g. 80% LTV for a conventional loan with 20% down). If the appraisal is low, that maximum loan amount is cut back, and the lender will not finance the gap. This is why appraisal gaps matter so much – they directly affect financing. The appraiser’s conservative approach is by design: they provide a check on runaway prices. As one veteran appraiser put it, their role is “to tell the client (lender) what the home is worth in the current market, regardless of the agreed price,” keeping emotion out of it. For the lender, a low appraisal is a safeguard; for buyers and sellers, it can be a frustrating roadblock.
It’s also worth noting that appraisers in Maryland must be licensed in-state and ideally have local knowledge. But sometimes, especially during busy times, an appraiser might be assigned from out-of-area, or one less familiar with a particular neighborhood. Lack of local knowledge or poor selection of comps can contribute to a low valuation. For example, using comps from a less desirable adjacent area, or failing to account for upgrades, could undervalue the home. These situations might be grounds for an appeal if evident. Overall, appraisers follow formulas and guidelines closely, and any factor that isn’t well-documented (like off-market sales or pending sales that went high) won’t influence their number – but it might have influenced the buyer’s offer.
Impact of Rising or Cooling Markets on Appraisals
The market’s temperature heavily influences appraisal gaps:
Rising Markets (Seller’s Markets): In a rapidly appreciating market (like the pandemic boom), appraisal gaps become much more common. Data from CoreLogic showed that in April 2021, 19% of homes nationally had appraisals below the contract price, more than double the rate of the previous two years. In other words, roughly 1 in 5 deals faced an appraisal gap at that peak. Maryland, especially areas like Montgomery County, saw many instances of this because home prices were climbing month by month. Appraisers were essentially chasing a moving target upward. Buyers were often willing to pay tomorrow’s price today, but appraisals were stuck at yesterday’s values. Low appraisals are a common side effect of a fast-rising market.
Cooling or Balanced Markets: When the market cools or stabilizes, appraisal gaps tend to shrink in frequency. With higher interest rates in 2022-2023, Maryland’s market saw fewer bidding wars compared to 2021. Prices even leveled off or dipped slightly in some segments. As a result, the incidence of low appraisals has come down. Nationally, by mid-2023 only around 8–10% of sales had an appraisal come in low, down from double digits during the frenzy. CoreLogic reported that in June 2024, 8.6% of home sales in closing had appraisal gaps (down from 10.7% a year prior as the market was cooling). So roughly 1 in 12 deals, versus 1 in 5 at the peak. In a cooler market, sellers aren’t getting as many sky-high offers, and recent comparables are more in line with current contract prices, making appraisals easier to support.
Flat or Declining Markets: If prices are flat or falling, it’s actually possible to have the reverse issue (appraisals coming in above contract price), but that usually doesn’t derail deals (since no one minds if the appraisal is high). However, one scenario to watch is if a buyer overpays in a declining market – appraisals will definitely not stretch to cover any overly optimistic pricing. Generally, though, low appraisals are less frequent when prices are steady or dropping, because buyers aren’t as likely to offer above asking in those conditions.
Rapid changes: One quirky impact in Maryland is when there are very recent sales that haven’t made it into the data yet. Maryland is an “information” state where sales prices are recorded in the MLS and public record, but if your neighbor sold yesterday $50k above list, the appraiser might not even know about it unless it closed before the appraisal was done. This is why sometimes agents meet appraisers and hand them evidence of recent pending sales or contracts. In a quickly rising market, a gap can occur simply due to timing – the comps are there, but they closed a week after the appraisal report. Conversely, in a cooling market, an appraiser might include a slightly older comp from when prices were higher, yielding a value a bit above what a conservative look would give (though appraisers try to weigh the trend).
In summary, hot markets breed appraisal gaps because buyer enthusiasm outpaces the historical data. Cooler markets reduce that gap because prices and past sales align more closely. Maryland has experienced both: in the red-hot market of 2021, low appraisals were a notable hurdle, while in the adjusted market of late 2022 and 2023, they became less common (though still possible, especially for first-time buyers and unique properties).
Maryland-Specific Trends in Appraisal Gaps
Frequency of Appraisal Gaps in Maryland Today
Maryland’s real estate market generally follows national patterns with some local quirks. During the height of the housing boom (2020–2021), appraisal gaps were alarmingly frequent. Realtors reported that it became “increasingly common for an appraisal to come in below the contract price” in those months. In fact, many Maryland buyers and sellers began to expect appraisal issues as a possibility on any deal. By one nationwide measure, up to 19% of transactions were seeing low appraisals in spring 2021 – and Maryland metro areas were no exception.
However, as the market has shifted, appraisal gaps are not as rampant now (2023-2024). With higher interest rates cooling off some of the frenzy, fewer homes are selling in bidding wars above list price, which means fewer appraisals are coming in short. Recent data show roughly 8–9% of sales involve a low appraisal nationally, and Maryland likely mirrors this range. That still means about 1 in 10 deals in Maryland might face an appraisal gap – not rare, but not inevitable in every sale. It’s a far cry from earlier in the pandemic when it felt like every other sale in some neighborhoods had this issue.
One Maryland-specific indicator: in the D.C. metro area (which includes parts of Maryland like Montgomery and Prince George’s counties), the prevalence of cash offers and larger down payments increased during the frenzy specifically to combat appraisal problems. Agents knew that to win, buyers had to remove or lessen appraisal concerns, so the market adapted. By late 2022 and 2023, with fewer bidding wars, we saw buyers regaining the ability to include appraisal and other contingencies. The result is that deals with appraisal gaps either are pre-negotiated (gap clauses) or there’s an expectation of renegotiation, making successful closings more likely even if an appraisal comes in low.
Areas in Maryland Seeing the Biggest Appraisal Issues
High-demand suburban markets have been ground zero for appraisal gaps related to bidding wars. For example, Montgomery County and the DC suburbs: Bethesda, Chevy Chase, Rockville, etc., saw intense competition. Homes often sold 10-20% over list, and many buyers waived appraisal contingencies to win. Those areas likely had a lot of hidden appraisal gaps – “hidden” in the sense that they didn’t derail deals because buyers covered them. If you’re buying or selling in an upscale, competitive Maryland market (parts of Montgomery, Howard, Anne Arundel counties, for instance), be mindful that prices pushed by competition may not align with appraisals. The upside is buyers in these areas often have the means to cover gaps, so deals still close.
Baltimore City and Prince George’s County have faced a different kind of appraisal gap issue at times – one rooted not just in market dynamics but in valuation bias and uneven recovery of values. There have been high-profile cases of appraisal bias in majority-Black neighborhoods of Maryland. Some Black homeowners in PG County and Baltimore have alleged their homes were undervalued simply because of their neighborhood demographics, compared to values those homes achieved only after “whitewashing” (removing indications of Black ownership) or selling to different buyers. This led Maryland to examine the issue: a Task Force on Property Appraisal & Valuation Equity was formed to address persistent misvaluation of minority-owned properties. These appraisal biases can create appraisal gaps in the sense that a buyer and seller agree on a price reflective of the true market demand in the community, but an appraiser (perhaps influenced by unconscious bias or poor comps) assigns a lower value. It’s an area-specific problem – for instance, parts of West Baltimore or older PG County suburbs might see this more – and Maryland is working on solutions (like improving comp data for historically undervalued areas).
Another scenario is revitalizing neighborhoods (often in Baltimore City) where the cost to rehabilitate a home exceeds the appraised value of the finished home. Maryland actually created an “Appraisal Gap From Historic Redlining” financial assistance program in 2021 to provide subsidies for redevelopment in areas where appraisals fall short of construction cost. This doesn’t affect typical buyer-seller deals directly, but it underscores that in certain urban markets, appraised values lag what people are willing to invest, because the comps reflect decades of disinvestment. If you’re buying in a revitalizing area, be prepared for potential appraisal challenges, as the surrounding sales might not yet justify the price of a fully renovated property.
On the flip side, rural or unique property markets in Maryland (like large homes on acreage, or eastern shore waterfronts) can experience appraisal gaps due to a lack of comparable sales. If you’re selling a unique property (farm, historic home, luxury waterfront with few nearby sales), your pool of comps is small, and appraisers might struggle to value it accurately. One or two low comps can drag your appraisal down even if buyers are willing to pay more for unique features. These areas are not “hot markets” in the same way, but the appraisal issue is uniqueness rather than competition.
In summary, most appraisal gap issues in Maryland cluster in two ways: (1) hot suburbs with bidding wars – gap caused by prices rising faster than past sales (e.g. Montgomery, Howard counties, etc.), and (2) historically undervalued or unique markets – gap caused by conservative valuations not catching up to current reality (e.g. some Baltimore City neighborhoods, Prince George’s County for bias concerns, or unique rural properties). Buyers and sellers should ask their agents about local appraisal trends: a good local agent will often know if “in this area, appraisals often come in low” and can advise strategies upfront.
Impact on Closing Timelines and Deal Success Rates
When an appraisal comes in low, it often adds time to the transaction. Instead of moving straight to closing, you now have a period of renegotiation or appeal. In Maryland, the standard sales contract (Maryland Realtors form) gives a timeline for appraisal contingency resolution if one exists – typically a window where buyer can object and parties try to resolve. Even without a contingency, practically, you’ll be delaying to figure out financing changes. How much delay? It can range from a few days for a quick negotiation to a couple of weeks if an appraisal reconsideration or second appraisal is attempted. For example, formally disputing an appraisal (asking the lender for a reconsideration of value) might take around two weeks for the lender to review and for an answer to come back. This can push a closing that was scheduled for end of the month into the next month.
Despite these hiccups, the majority of deals still manage to close. It’s interesting to look at the data: During the hot market, appraisal issues were a leading cause of delayed closings. According to the National Association of Realtors, in May 2021 about 26% of home sales experienced a delay due to appraisal problems (up from 18% in May 2020), and roughly 13% of transactions were actually terminated (fell apart) because of appraisal issues, more than double the prior year’s rate. This jump illustrates how much appraisal gaps strained deals at the peak of the market. In Maryland’s frenzied market, we did see some contracts ending over appraisal – especially if neither side would budge and no contingency existed to force a price reduction.
How Appraisal Issues Impacted U.S. Home Sales: In May 2020 (a moderately competitive market), 18% of sales faced delays due to appraisal issues and 6% were terminated. By May 2021 (an ultra-hot market), appraisal issues caused delays in 26% of sales and 13% of contracts were terminated due to low appraisals. This reflects the spike in appraisal gaps during a hot market. Maryland’s market during this period saw similar trends, with more deals stalled or at risk from low appraisals.
Fortunately, as the market normalized, those percentages have come down. Today, far fewer deals are blowing up because of appraisals. In the Maryland/DC region, over 97% of deals have been closing successfully (only a small ~3% fall-through rate), as many buyers and sellers find ways to work things out. Appraisals can still cause heartburn, but they’re usually solved via the methods we’ll discuss (covering gaps, renegotiating, etc.). It’s now relatively rare for a sale to die solely due to an appraisal, except when the gap is enormous or one party refuses any compromise.
In terms of closing timelines: Maryland contracts often set a closing date several weeks out. If an appraisal comes in low, expect that you may need to amend the closing date or push it back a bit to allow for negotiations or a new appraisal. Lenders also need time to adjust the loan if terms change (like a different down payment amount). Realistically, a low appraisal could add 1–2 weeks to your closing timeline in a worst-case scenario. All parties should remain in close communication. If you’re a seller and have a purchase of your own hinging on this sale, build in a buffer or have a plan B if your buyer’s appraisal causes delays.
Another Maryland-specific consideration is appraisal turn times: In busy seasons, getting a second appraisal scheduled (if you go that route) might be hard within a short period. Maryland has a decent pool of appraisers, but rural areas or busy summer months can mean waiting for an appointment. Thus, the impact on timeline also depends on how quickly an appraiser can revisit if needed.
Deal success rates with appraisal gaps often come down to attitude and flexibility. If both sides approach the low appraisal as a problem to solve together (rather than a fight), success is higher. In many cases, sellers and buyers remember they both want the sale and find a middle ground. The data from NAR’s Realtors Confidence Index suggests that by 2022, fewer than 10% of contracts were seeing appraisal issues, and an even smaller fraction were falling through because of it. So overall, while a low appraisal can jeopardize a deal, most Maryland transactions still close – either on time or with a slight delay – because buyers and sellers find a workaround. Just go in with eyes open and a cooperative mindset.
Negotiation Strategies for Appraisal Gaps
If an appraisal gap occurs, negotiation is key. Both buyers and sellers have options to bridge the gap and keep the deal alive. Here are strategies for each side, and guidance on when it might be best to walk away.
What Buyers Can Do
Bring Extra Cash to the Table: The simplest (though not always easiest) solution is for the buyer to cover the gap out-of-pocket. This means increasing your down payment or otherwise coming up with the difference between appraised value and contract price. For instance, if there’s a $10,000 shortfall, you pay that $10k in cash at closing in addition to your planned down payment. In a seller’s market, this is commonly expected – sellers often ask buyers to make up the difference. Make sure you inform your lender if you plan to reallocate some down payment money to cover the gap (so they adjust the loan parameters accordingly). Essentially, you’re paying the original price, just with more cash and a slightly smaller loan. This option is easiest if the gap is small or if you have significant savings.
Renegotiate the Price: Often, buyers can push the seller to reduce the price to meet the appraisal halfway. Don’t be afraid to reopen negotiations. Show the appraisal report to the seller (it’s a neutral third-party opinion) and make the case that “the house isn’t worth what we offered, according to the appraiser.” Many sellers will be willing to compromise rather than lose the sale. For example, a buyer might say, “Split the gap with me – lower the price by $10k and I’ll cover $10k,” which is a fair proposal if both want the deal. Use logic: if the next buyer might face the same appraisal issue, it’s in the seller’s interest to work with you now. Be reasonable – asking the seller to drop the full amount might work or might not, but asking for a share of it is often effective.
Challenge the Appraisal: If you truly believe the appraisal missed the mark, work with your lender to request a reconsideration. As the buyer, you usually have to initiate this with the lender – provide them with any better comparables that were not used, or point out errors (e.g., the appraiser measured the square footage wrong, or ignored a recently renovated kitchen). Lenders have formal processes to review appraisal disputes. It typically takes a couple of weeks and results are not guaranteed. But if, say, the appraiser used 6-month-old comps and since then two higher sales closed, a reconsideration might bump the value up. Remember, only factual errors or overlooked data will sway an appraiser – you can’t argue opinion. If the appraisal is blatantly flawed, sometimes the lender might even order a second appraisal (especially on conventional loans) or get a desk review. Who pays? Usually the buyer pays for a second appraisal if it comes to that (sometimes splitting cost with seller). If the gap is large, an appeal is worth a try before giving up or paying tens of thousands extra.
Adjust Your Loan Structure: Talk to your lender about creative financing solutions. If you have to cover an appraisal gap, one way to lessen the immediate cash burden is to put less down payment and take on Private Mortgage Insurance (PMI) temporarily. For example, one buyer had a $25k gap and rather than paying the full $25k on top of a 20% down payment, she reduced her down payment and the lender was okay proceeding as long as she paid PMI of about $60/month. This allowed the loan to cover more of the purchase price. If you were aiming for 20% down, even going to 15% down frees up 5% of the price in cash that can cover a gap (you’d pay PMI until you reach 20% equity, which could be a minor cost in the interim). This strategy depends on you still meeting loan approval guidelines (your debt-to-income ratio, etc., must handle the slightly larger loan). But if you have a strong financial profile, lenders may be comfortable extending the loan despite the low appraisal by using PMI or other tweaks. Essentially, you finance part of the gap. Discuss this option with your mortgage officer.
Use Contingencies to Walk Away: If you included an appraisal contingency and the gap is too large or you’re not willing/able to cover it, invoke your contingency to exit the contract. This should allow you to cancel and retain your earnest money (assuming you follow the contract’s timeline for doing so). While losing the house is disappointing, sometimes walking away is the financially sound decision. There will be other homes; you don’t want to overpay beyond what even the bank thinks it’s worth, especially if you feel the appraisal was actually accurate. The contingency is there to protect you. Make sure you notify the seller in writing within the contingency period if you choose this route. Keep in mind the seller might come back to negotiate rather than lose you – you can use the threat of walking away as leverage too.
Include an Appraisal Gap Clause Upfront: Looking forward, if you haven’t yet encountered a gap but worry you might (say you’re making an offer on a home likely to appraise lower), you can include a specific clause in your offer. For instance: “In the event of a low appraisal, buyer agrees to pay up to $X above appraised value, not to exceed the purchase price.” This kind of clause can make your offer more attractive (since the seller knows you’re less likely to walk from a low appraisal), and it sets clear expectations for you as the buyer. You know your maximum additional cash exposure. If the gap is bigger than that, the clause usually allows for renegotiation or cancellation. Using such a clause can prevent stalemate situations because both parties pre-negotiated the outcome. Just be sure you indeed have that $X available if needed.
Communicate and Be Flexible: Sometimes there are hybrid solutions. Maybe the seller can throw in some personal property or agree to fix something as part of conceding on price – anything to make both sides feel okay about the compromise. As a buyer, try to keep the dialog open. If you really want the house, express that, but also respectfully explain your limits. Sellers appreciate a good-faith effort to make things work. If you hit a brick wall, you’ll at least know you tried every avenue.
What Sellers Can Do
Request a Reconsideration or Second Appraisal: As the seller, you can’t directly demand the appraiser change the value, but you can encourage the buyer to initiate an appraisal appeal with their lender (often called a reconsideration of value). Work with your listing agent to gather any evidence that supports a higher value – maybe other comps the appraiser missed, or updates and renovations that weren’t fully credited. Provide this to the buyer’s agent quickly. A well-documented case might convince the lender and appraiser to revise the value. If you feel the appraisal was very wrong, you can also suggest the buyer ask for a second appraisal (perhaps with a different appraiser). Some lenders will allow this especially for conventional loans, though policies vary. You might consider offering to pay for the second appraisal (or split it) as a gesture, since it’s an out-of-pocket cost for the buyer. Keep in mind, appeals are hit or miss – only pursue this if you have reason to believe the appraisal was flawed or incomplete. If it’s just that the market moved too fast, a second appraisal may come in similarly.
Reduce the Price (at least partially): The most straightforward solution is often for the seller to adjust the price down to meet somewhere closer to the appraised value. If you can afford to, agree to a price reduction that either meets the appraisal or splits the gap with the buyer. Yes, you’re taking less than you hoped, but remember that if this sale falls apart, any new buyer might face the same appraisal issue, and you’ll have lost time (and still likely end up at a similar price). For instance, one Maryland seller had to drop their contract price by $5,000 (on a $395k sale) when the appraisal came in low, and the buyer covered the rest – the deal stayed intact. Think of it this way: you’re essentially funding part of the gap for the buyer, which might be necessary to get the deal done. Run the numbers – a small concession now could save you carrying costs of an extra month or two on the market, or the risk of a lower offer next time.
Offer to Split the Difference: A very common outcome is meeting halfway. If an appraisal is, say, $20k low, propose that you’ll come down $10k if the buyer brings $10k. This way, both parties feel a bit of pain and a bit of relief. It’s psychologically palatable and often seems “fair” when no one is at fault for the low appraisal. Many agents will recommend this approach because it’s a win-win: the buyer doesn’t have to shoulder the whole gap, and the seller doesn’t lose the entire amount either. Most importantly, the sale proceeds. As one agent noted, usually both sides show a willingness to accommodate each other to make the sale happen.
Provide a Seller Concession or Credit: Instead of an outright price drop, you can offer a credit to the buyer that effectively covers some of their costs. For example, a $5,000 credit that the buyer can use toward closing costs. This frees up the buyer’s cash (since they don’t have to pay those $5k in costs), which they can then use to cover the appraisal gap. The net to you as a seller is the same as lowering the price $5k, but sometimes framing it as a credit is more palatable or easier depending on the loan (some loans limit credits, but generally a few percent is allowed). In one case, an investor-buyer asked for a $5k credit to offset a low appraisal and the seller agreed, which helped the buyer proceed despite the gap. This strategy might be useful if the buyer is tight on cash but otherwise qualified. Basically, you’re helping fund the gap indirectly.
Consider “Appraisal Gap” Insurance Products: While not common, some niche companies or loan products offer insurance or financing specifically for appraisal gaps (more often seen in commercial deals than residential). It’s unlikely your transaction will involve this, but worth mentioning: a few creative programs have popped up in recent years to address appraisal issues in hot markets. For example, some lenders have bridge loan options or niche products that allow second-position loans to cover gaps. These aren’t standard, though, and typically the onus is on the buyer to have arranged something. As a seller, you might simply ask the buyer/lender, “Is there any program that can help here?” It’s a long shot, but occasionally a local credit union or bank might have flexibility.
If Relisting, Adjust Strategy: If worst comes to worst and the deal falls through, take the appraisal as feedback. When you go back on market, you might want to adjust your price to something closer to that appraised value to avoid repeating the scenario. Also, you now have knowledge: if the previous buyer was FHA, that appraisal will stick for future FHA buyers for a few months, so you may want to target conventional or cash buyers next, or wait out the 120-day period. Be transparent (to a point) – sometimes listing agents mention “Home was appraised at $X” in confidential remarks to signal to other agents where things stand.
Leverage Backup Offers or Re-list Hype: If you truly believe the appraisal was off and you have reason to think you can get the same price (or higher) with another buyer, you might choose to walk. Maybe you had a backup offer that was cash or with a larger down payment who might not care about the low appraisal. In Maryland, it’s not uncommon for sellers to go under contract quickly and then, if it falls apart, get renewed interest since buyers who missed out jump at the second chance. This is a risky maneuver but can be considered if the gap is unacceptable to you and the current buyer won’t compromise. Essentially, you’re betting that either you’ll find a buyer who will cover the gap or an appraiser who will value it higher next time. Just remember there’s no guarantee – you could also end up at a lower price if the market softens or stigma attaches to the listing (other buyers may wonder why it fell through). Use this only if you’re prepared for the possible fallout.
When Walking Away Is the Best Option
Sometimes, despite everyone’s best efforts, the numbers just don’t add up or one party reaches their limit. Knowing when to walk away (and actually doing it) can be tough, but it’s important to be willing if the situation calls for it.
Buyers: If covering the gap will strain your finances to an uncomfortable level, or if you feel you’re overpaying beyond the home’s true value, it may be wisest to walk away. No one likes to lose a house they fell in love with, but remember that paying, say, $50,000 above appraisal is effectively paying $50k more than what similar homes have sold for. Unless you have a very long-term outlook and strong reasons to believe the value will catch up quickly, you might be better off letting this one go. Protecting your financial health is crucial – you don’t want to become house-poor or regret the purchase. If you had a contingency, you can exit without penalty. If you waived it, you can still try to walk but risk your earnest money; sometimes a seller might voluntarily return the deposit or a portion if they find another buyer quickly, but that’s not guaranteed. It’s a last resort, but your earnest money might be a smaller loss than overpaying by tens of thousands. Every situation is different. Talk it over with your agent and maybe your financial advisor. If your gut (and spreadsheets) say it’s a bad deal now, even though you loved the home, then walking away is the right choice. There will be other opportunities. As one real estate professional put it, it’s not the end of the world – you do have the option to walk away. Keep that perspective.
Sellers: For sellers, walking away (letting the deal die) may make sense if you strongly believe the appraisal is wrong and that you can get a better outcome with a different buyer. Maybe you have backup offers, or maybe you’re in no rush and can relist at a better time. If the buyer can’t close the gap and you’re not willing to lower the price to what the appraisal says, parting ways might be the only path. This is essentially betting that either the next appraiser will see the value, or you’ll find a cash/conventional buyer who won’t mind the gap. Before you pull the plug, realistically assess: was the appraisal perhaps accurate and your home really isn’t worth what you hoped? If all signs point to “the value just isn’t there,” holding out for more money could be futile and you might chase the market down. But if you have evidence or reason to think this was a one-off low appraisal, you might salvage more with a new buyer. Walking away is a tactical decision – ensure you’re doing it for the right reasons (future benefit, not pride). Also, consider the time lost. If you’re okay with delaying your plans by weeks or months for a chance at a higher price, it might be worth it. If you’re on a timeline (e.g., you already moved or bought another house), swallowing a price reduction now could be smarter than uncertainty. There’s also the emotional aspect: some sellers feel offended by a low appraisal and dig in their heels. Try to separate emotion from business. Make a cold calculation whether moving on from this buyer improves your outcome or not.
Both parties (when agreement is elusive): Sometimes neither side is “wrong” – they just can’t agree. The buyer might truly not have more cash or might feel they’re overpaying, and the seller might feel they’re already at rock bottom. If after good-faith negotiation you’re at an impasse, it’s likely best to dissolve the deal. Continuing to argue will just waste time and breed resentment. It’s akin to a divorce – better to split and each try new partnerships than force something unworkable. Recognize stalemate and use whatever contract clauses are in place to exit amicably if possible. In many cases, both sides are disappointed, but after a walk-away, the buyer finds a similar home that appraises fine, and the seller eventually finds a buyer who can close – so it usually works out in the end.
Learn and move forward: If you do walk away, learn the lessons. Buyers, perhaps next time you won’t waive the appraisal contingency unless you’re truly prepared, or you’ll be more conservative in a hot market. Sellers, maybe you’ll price a bit more cautiously or be more upfront about your appraisal expectations. Use the experience to inform future strategy.
In summary, walking away is the nuclear option – not desired by either party – but it’s there for a reason. Don’t be afraid to use it when proceeding would put you in a bad spot. It’s better to have a deal fall apart than to force a bad deal through and regret it later. Both buyers and sellers should keep this tool in their back pocket, even as they try other solutions first.
Loan-Specific Considerations in Appraisal Gaps
Different types of loans (Conventional, FHA, VA) have varying rules and practices when it comes to appraisals and how to handle low valuations. Maryland home buyers use all these loan types frequently, so it’s important to understand the nuances.
Conventional Loans
Conventional loans (those not insured by the government, typically conforming loans sold to Fannie Mae/Freddie Mac) have the most flexibility in handling appraisal gaps, but also the least built-in protections for the buyer (aside from any contract contingencies). Key points:
Appraisal contingency is key: With a conventional loan, nothing in the loan program itself will save the buyer if an appraisal is low – it’s entirely on the buyer and seller to resolve. So if you’re a conventional buyer, that appraisal contingency in the contract is your safety valve. If you waived it, you must cover the gap or negotiate because otherwise the lender won’t lend the full amount and you’d be in default for lack of funds. If you have it, you can exit if needed.
Down payment adjustments: Conventional loans allow you to adjust your down payment. Suppose you were putting 20% down and the appraisal comes in low – you can still often proceed by putting, say, 15% down on the lower appraisal and thus borrowing a bit more (and potentially paying PMI). Lenders will usually accommodate this as long as you still qualify. This is a common way buyers handle gaps: they keep the loan amount the same as originally planned and just shift ratios. For example, contract $300k with 20% down is a $240k loan. If appraisal comes at $290k, the lender will lend 80% of $290k = $232k for 20% down; but the buyer can choose to take a $240k loan on $290k value, which is about 83% LTV, and pay PMI on that small extra amount. The buyer then brings $50k down instead of $60k, using that $10k to cover the difference. The result: buyer still pays $300k (with $50k cash + $240k loan), the lender is okay because the buyer is now at ~17% down with PMI. This is exactly what happened in a case where a buyer’s home appraised $30k under – the lender was comfortable proceeding with a higher LTV because the buyer had great credit and low debt, requiring just a small PMI premium. Conventional loans are pretty flexible as long as the buyer’s profile supports it.
No official “escape clause” but contract can provide one: Unlike FHA/VA, there’s no mandatory clause allowing cancellation if the house doesn’t appraise. It’s purely governed by the contract terms you agreed on with the seller. So conventional buyers need to negotiate that up front (which is the appraisal contingency). Sellers know this; some prefer conventional offers because they think the appraisal process might be “easier” (not always true) or at least they know if the buyer waived the contingency, that buyer is on the hook.
Appraisal waiver possibilities: In some cases, a conventional loan might not require an appraisal at all. Fannie Mae and Freddie Mac have automated underwriting that sometimes issues an “appraisal waiver” if the borrower is very strong and the sale price seems in line with their database of values. In Maryland, this has happened especially in cookie-cutter subdivisions or refis, less so on unique properties. If an appraisal waiver is granted, no appraisal gap issue will occur because there’s no appraiser – the lender essentially accepts the value. As a buyer, you can’t count on this, but it’s a nice surprise when it happens. If you suspect the value is tight, you likely won’t get a waiver (they’re more common when the LTV is low).
Appraisal appeals: With conventional loans, lenders do allow appraisal challenges. Typically the buyer (through their agent) submits a reconsideration request with comparable sales, and the lender’s appraisal review department will evaluate. If they find merit, they may ask the original appraiser to revise or might order a second appraisal. Be aware, lenders are cautious – they won’t order multiple appraisals just because a value is inconvenient. There needs to be a clear indication something was off. As mentioned earlier, the buyer can ask the lender to contest the appraisal, but results vary. Don’t bank on a huge change; small adjustments sometimes happen (e.g., value revised from $400k to $410k if a comp was indeed missed), but large gaps rarely disappear via appeal.
Timeline and rate lock: If you’re going through appeals or second appraisals with a conventional loan, keep an eye on your rate lock expiration. If your interest rate was locked for 30 days and this pushes closing out further, you might need to pay to extend the lock or risk losing your rate. This is another reason to act quickly and efficiently if an appraisal issue arises.
Seller perception: In Maryland, many sellers slightly favor conventional loans over FHA/VA, partly due to appraisal myths (e.g., that conventional appraisals are higher or less strict – which isn’t universally true, but perception exists). From a negotiation standpoint, a conventional buyer might have an easier time convincing a seller to stick with them through a low appraisal, whereas some sellers get skittish with FHA/VA thinking “the next FHA/VA will be the same.” Each case differs, but conventional financing is often seen as more “straightforward” on appraisal matters – it’s just numbers to sort out.
FHA Loans
FHA loans (backed by the Federal Housing Administration) are common among first-time buyers in Maryland due to their lower down payment requirements. FHA has some unique rules around appraisals:
Amendatory clause (Escape clause): Every FHA sales contract (it’s actually a required addendum) includes the FHA Amendatory Clause. This clause basically says if the property doesn’t appraise for at least the purchase price, the buyer can walk away penalty-free (earnest money refunded). Importantly, the buyer cannot be forced to go through with the purchase at a higher price than the appraisal. Even if a buyer waived their appraisal contingency in the contract, the FHA clause still gives them an out – it’s a consumer protection. Sellers should be aware of this: if you’re dealing with an FHA offer, that buyer always has the right to back out if appraisal is low (they can choose not to, but you can’t hold them to the price unless they agree).
Appraisal sticks with the property: A big FHA consideration – the FHA appraisal is logged in a database and stays with the property for 120 days (recently extended to 180 days due to some updated guidance). This means if your FHA buyer walks away due to a low appraisal, and another FHA buyer comes along next week, the new buyer’s lender will likely be forced to use the same appraisal value (if within that 4-6 month window). You can’t just get a fresh second FHA appraisal unless that time period expires or you manage to get a formal rejection of the first (which is tough). For Maryland sellers, this is critical: a low FHA appraisal can haunt your listing for months. In such a case, you might pivot to seeking conventional or VA buyers next, since they can get a new appraisal. Conversely, if you’re an FHA buyer who still wants the house, you know the seller is aware of this – it might strengthen your hand in negotiation because that seller knows no other FHA buyer can pay more either in the near future.
FHA appraisal standards: FHA appraisals have two components: value and a check of property condition against FHA’s Minimum Property Requirements. FHA appraisers will flag certain repairs (peeling lead paint in older homes, safety issues, etc.). Sometimes a seller will prefer a conventional buyer to avoid repair hassles that an FHA appraiser might require. If an FHA appraisal comes in low and also calls for repairs, it can really complicate things – the seller might have to fix items and deal with a pricing issue. In Maryland’s older housing stock, FHA appraisers commonly flag things like missing handrails, chipping exterior paint, or old electrical issues. So that’s another facet: a low FHA appraisal might be partly due to condition adjustments. If you can remedy the conditions (do repairs) and ask for a reappraisal or updated appraisal, you might get some value back. But generally, condition issues won’t directly cause a “low valuation”; they’d either be required to be fixed or the loan can’t close.
Handling the gap: If an FHA appraisal is low and the buyer still wants to proceed, they can cover the difference just like a conventional buyer would (more cash down). FHA loans typically require as little as 3.5% down, but buyers can always put more. If the appraisal is, say, $10k low, the FHA buyer can put that extra $10k in cash plus their 3.5% of the appraised value. The loan will be based on the lower value. The challenge is many FHA buyers are first-timers with limited cash, so covering a gap might be harder – that’s why so many FHA deals fall apart or renegotiate on low appraisals. It’s not that FHA appraisals are inherently lower; it’s often the borrower’s capacity to handle it is lower. As a buyer, if you’re FHA, try to save a bit extra beyond your down payment in case you need to bridge a small gap. As a seller, know your FHA buyer’s profile – if they barely scraped together the down payment, expecting them to cover an appraisal gap is unrealistic.
Appraisal appeals (HUD Tidewater equivalent?): FHA doesn’t have a Tidewater (that’s VA-specific), but lenders can request a reconsideration of value from HUD. It’s usually the same process of providing comps. Success requires solid evidence. It’s worth a try if the gap is deal-breaking, but much like conventional, you won’t often see an FHA value changed unless a glaring comp was missed.
Maryland usage: In Maryland, FHA loans are quite common, especially in more affordable areas and for townhomes/condos that are FHA approved. Sellers sometimes have old biases thinking FHA appraisals always come in low. In reality, FHA appraisals use the same methodology as conventional; any difference is often perception or related to condition items. However, studies (and anecdotes) have shown that on average, FHA appraisals can be slightly more conservative in hot markets – possibly because FHA buyers often buy lower-priced homes which may be more prone to big jumps or limited comps. If you’re a buyer using FHA in a multiple-offer situation, be aware the seller might be worried about appraisal. You could counter that by offering a bit more down or an appraisal gap clause to show you’re serious (yes, FHA buyers can do that too, it just means they’d have to bring extra cash, which not all have).
If the deal falls apart: From a seller perspective, if an FHA deal dies due to appraisal, you might consider paying for a pre-listing appraisal by a different appraiser before putting it back on market, just to see if there’s a case to challenge HUD’s value (though changing it is hard). Or focus on non-FHA buyers next. Maryland sellers sometimes even advertise “no FHA” after a bad experience, but note that as of 2023, outright rejecting FHA offers could raise fair housing questions unless you have a valid financial reason. It’s better to say “prefer conventional or cash” in remarks than “no FHA” – and often it’s because of the appraisal sticking issue.
In essence, FHA loans protect the buyer heavily but can hurt the seller if an appraisal comes in low. Sellers should weigh the risk when accepting FHA offers (and perhaps counteroffer an appraisal gap guarantee if the price seems aggressive). Buyers using FHA should be mindful of these dynamics and possibly avoid massively overbidding unless they have some extra cash reserves.
VA Loans
VA loans (backed by the Department of Veterans Affairs) are popular in Maryland due to the large military and veteran population (especially around Fort Meade, Andrews AFB, etc.). VA loans have unique protocols for appraisals that can actually help mitigate low appraisal issues:
VA escape clause: Similar to FHA, VA loans include a clause (often called the “VA Amendatory Escape Clause”) that allows the buyer to walk away if the property appraises for less than the contract price. The veteran buyer cannot be forced to complete the purchase if the appraisal is low (unless they choose to). This protects VA buyers from being obligated to cover a gap they can’t or don’t want to cover. Sellers dealing with VA offers should assume the buyer has an appraisal contingency one way or another, because of this rule.
Tidewater Initiative: This is a unique VA feature that gives a heads-up if the appraisal might come in low. If a VA appraiser determines that the value is likely to fall short of the purchase price, they invoke “Tidewater.” This means before the appraiser finalizes the report, they notify the lender/agents and give them 48 hours to provide additional comparable sales or evidence in support of the contract price. It’s essentially an opportunity for the buyer’s agent (and seller’s agent) to say, “Wait, consider these other comps, or this info, the house is really worth it!” Tidewater does not guarantee the value will be met, but it ensures that no stone is left unturned – the appraiser hears the best arguments for the higher value. In practice, Tidewater has saved many VA deals from low appraisals. Even if the value still comes in low, at least everyone is better prepared for it (it’s not a surprise drop on your desk; you kind of see it coming).
Reconsideration of Value (ROV): If after Tidewater the value is still low, the VA loan process allows a formal Reconsideration of Value request. The buyer (and their agent/lender) can submit a case to the VA with why they believe the appraisal should be higher – maybe including comps that the appraiser didn’t use, or highlighting errors. The VA staff (VA appraisers or reviewers) will then review and can adjust the value if they find merit. It’s not common to completely overturn an appraisal, but minor increases might be granted. It’s another layer of potential relief that conventional loans don’t have as formally. Essentially, VA provides two chances to argue the value – Tidewater (preliminary) and ROV (after the fact).
Conservative or not?: There’s a long-standing myth that VA appraisals are “tougher” or come in lower than others. The VA actually has published data in the past indicating their appraisal values generally track with conventional ones. VA appraisers do have to be VA-approved and follow VA guidelines. They also have Minimum Property Requirements like FHA (safety, soundness, sanitation), which means they might require repairs for things like peeling lead paint, bad roof, etc. In Maryland, homes that are older might face some repair requirements under VA – similar to FHA. But value-wise, VA appraisers aren’t instructed to be extra conservative. In fact, VA appraisers know that the VA really tries to help veterans get into homes (hence Tidewater). So while experiences vary, you shouldn’t assume a VA appraisal will be low. Many VA deals appraise at or above the price just fine. When issues do occur, it’s often because the veteran might have offered a bit high to compete (since VA loans allow 0% down, some sellers worry about that, and the buyer might have to go high in price to win).
Buyer covering gap with VA: If the appraisal is low and the veteran still wants the home, they can choose to cover the gap from their own funds, just like any buyer. VA loans allow this – the borrower can pay the difference, or a portion of it, and proceed. They’re not obligated to, but they can. One nice aspect: if the buyer was planning to put some money down initially (even though VA doesn’t require it), they can redirect that down payment to cover the gap. Many VA buyers put $0 down normally; if they have some savings, that can be used for a gap. Also, VA has no PMI, so taking a larger loan (when covering less gap) doesn’t add extra monthly fees beyond slightly higher payment. It’s essentially a math game of how much the veteran can/wants to pay vs how much the seller will budge.
No down payment effect: Note that if a VA buyer covers an appraisal gap, that money is effectively an extra down payment but it doesn’t change the loan’s LTV officially – the VA loan will consider the sale price or appraised value (whichever is lower) for determining if any down payment is needed. VA will guaranty up to the appraisal value. Anything above, the buyer is just bringing as cash equity. So the VA loan still is 100% (or whatever percent) of the appraised value, and the buyer’s additional cash is outside of the loan. This is fine, it’s just how it works technically.
Maryland specifics: Maryland has a lot of VA borrowers. Sellers sometimes worry about VA appraisals but in recent years, VA buyers have competed strongly by waiving contingencies and even offering to cover appraisal gaps. It’s not unusual now to see a VA offer that says “buyer will pay $X over appraised value if low” – essentially waiving the appraisal up to a point. VA rules allow buyers to do that (the escape clause means they can back out if they want, but they can contractually choose to waive that protection). A Vetted VA source notes that buyers can waive the appraisal contingency and say they’ll cover any gap, often with a cap on the amount. So VA buyers can play on the same field as conventional in that regard if they have the means.
Speed and timeline: One thing to mention is that VA appraisals are ordered through the VA system and have set timetables. In Maryland, VA appraisals typically are completed within 10 business days (varies by area). The Tidewater process adds a 2-day window for comps. If an ROV is filed, that could add another week or more. So, a low VA appraisal could delay things somewhat, but usually the VA is quite responsive. In fact, some find the whole Tidewater and ROV process resolves things within just a week or so, which is not bad.
Repair negotiations: If the appraisal gap is small but the VA appraiser also required some repairs (say the house needs $2k of fixes to meet VA standards), sometimes a deal can be made where the seller agrees to the repairs and maybe half the gap, and the buyer covers the rest, etc. Keep in mind, if repairs are required, someone has to do them (often the seller) before closing or money escrowed for after. That’s an additional negotiation separate from value, but it can tie into how you negotiate the dollars.
In summary, VA loans come with built-in safeguards and a friendlier process for handling low appraisals (from the buyer’s perspective). They also assume a bit more work for the seller (potential repairs, the uncertainty of Tidewater, etc.). However, VA deals are closing in Maryland all the time, even with appraisal gaps – it just takes communication and using the tools VA provides. If you’re a veteran buyer, lean on your lender and agent; they’ll help you navigate Tidewater and any appeals. If you’re a seller, don’t be overly scared of a VA offer – yes, the appraisal could require you to address things, but the vast majority of VA buyers and their lenders will do everything possible to make the deal work (and the buyers themselves are often very committed to the home).
Maryland Lender Policies on Appraisal Appeals & Second Appraisals
Most lenders in Maryland, whether local banks, credit unions, or national banks lending here, follow similar guidelines when it comes to low appraisals:
Reconsideration of value (ROV): As discussed, virtually all lenders have an internal process to request an appraisal review. They’ll typically require a written request with supporting comparables or arguments. The turnaround can be days to a week or more, depending on the lender. Some lenders are more proactive – if the value is just a tad low, they might themselves look and say “hmm, this comp could justify a bit higher, let’s ask the appraiser to take another look.” Others leave it entirely on the borrower/agent to initiate. Maryland lenders do not have any special state-specific rules here; it’s more about the company’s policies.
When will a lender allow a second appraisal? Generally, if an appraisal is believed to be factually erroneous or the appraiser is suspected of incompetence, a lender might get a second opinion. But regulations after the 2008 crash (HVCC/Dodd-Frank) discourage “appraisal shopping,” so lenders can’t just order multiple appraisals and pick the highest. They need a justification. Some examples: the appraiser might be from out of the area and clearly missed the mark – the lender might then order a second appraisal by a more local appraiser. Or if the appraisal had violations of guidelines, a new one might be needed. Maryland lenders will usually not allow a second appraisal just because the buyer or seller is unhappy with the value – there has to be evidence the first was wrong. However, if the buyer switches to a new lender, that new lender will order their own appraisal (starting the process fresh). This is a tactic buyers sometimes use: if time permits, they go to a different lender hoping a new appraiser sees it differently. This is risky and only feasible if you have a lot of time or the seller is willing to delay closing significantly.
Appraisal review companies: Some larger lenders use an appraisal management company (AMC) to oversee appraisals. The AMC might offer a service called a “Value Reconsideration” or a “Field Review.” A field review is when another independent appraiser reviews the first appraisal (sometimes even does a drive-by) to give an opinion if it was reasonable. This can be cheaper and faster than a whole new appraisal and might result in a slight adjustment if the review disagrees with something. Borrowers usually don’t directly request this – it’s something the lender decides to do as part of the appeal process.
Success rates: It’s important for buyers and sellers to set expectations – most appraisal appeals do not result in drastic changes. According to some industry sources, fewer than 10% of appeals actually lead to a higher valuation, and often the increase is modest (a few thousand dollars) unless a blatant error was made. In Maryland, unless you find that the appraiser used comps from, say, the wrong school district or missed that your home has an extra bathroom, it’s an uphill battle. That said, it costs nothing to try except time.
Local appraiser pool: Maryland has a state appraisal board and a finite pool of appraisers, especially in certain regions. If you get the same appraiser on a second try, obviously expect the same result. Typically, lenders would ensure a different appraiser if re-appraising. Fun fact: In smaller counties or rural parts of Maryland, there might only be a handful of active appraisers, so odds of getting the same one twice are higher.
Lender leniency: Some Maryland lenders, particularly smaller local banks or portfolio lenders, might be a bit more flexible. For example, if you’re using a local bank that keeps the loan in-house, they might have more discretion to say, “We believe in the value, we’ll still do the loan at the higher amount.” This is rare for residential loans, but not unheard of, especially if you have a strong relationship or the bank has other collateral. More likely, a local lender might stretch loan guidelines a bit to allow a higher LTV (essentially same solution: you bring a bit less down, they do slightly more than 80% loan) without a full appraisal redo. Some credit unions in Maryland have been known to be more accommodating on low appraisal if the gap is small and the borrower is extremely well-qualified.
Maryland regulations: There aren’t special state laws about appraisals in home purchases beyond the national standards. Maryland does have consumer protection laws but nothing that forces a lender’s hand on appraisals. The state’s concern has been more on the side of preventing appraisal bias (as discussed). If a consumer truly felt discrimination played a role, they could file a complaint with Maryland’s Commission on Civil Rights or the appraisal board. But that’s likely beyond the scope of a typical transaction timeline (more of a long-term issue).
Communication is crucial: Maryland is a title attorney or title company state for closings, so often the title attorney might get involved to amend contracts or push closing if needed. Everyone should communicate: the lender informs the agents of what can be done, the agents negotiate buyer/seller changes, and any contract addenda (like price change) are signed and sent to the lender for the final loan approval. We mention this because sometimes delays happen simply from miscommunication. A proactive approach (with all parties looping in the lender early when an appraisal is low) can save days of back-and-forth.
In sum, Maryland lenders handle low appraisals like lenders everywhere – through established processes of review or new appraisal only when justified. Buyers should quickly decide if they want to push an appeal or pivot to negotiating, as time is of the essence. Sellers should understand the lender’s not being obstinate – they’re bound by these rules and can’t just ignore an appraisal. Work with the system, and use negotiation concurrently to cover all bases.
Case Studies & Real-World Examples in Maryland
Let’s look at some examples of how appraisal gaps have played out in real transactions, including some Maryland scenarios, to illustrate the concepts we’ve discussed:
Buyer Covers Small Appraisal Gap to Win the Home: A young couple in Anne Arundel County agreed to pay $450,000 for a home listed at $430,000 after a bidding war. They waived appraisal contingency but included a clause that they would pay up to $10,000 above a low appraisal. The appraisal came in at $440,000 – a $10k gap. Because they had planned for this, the buyers used $10k from their savings to cover the difference and closed at the full price. They really wanted the home and had prepared to cover a gap, so it worked out. Their lender simply adjusted their down payment slightly downward to allow that $10k to go toward the gap. The key lesson: by planning ahead (both financially and contractually with the gap clause), the buyers successfully navigated a low appraisal without needing any concession from the seller.
Seller and Buyer Meet in the Middle (Split the Gap): A Maryland seller in Howard County listed a townhouse at $495,000. Multiple offers came in and the seller chose one for $505,000 (over asking). When the appraisal was completed, it came back at exactly $495,000, the original list price. The gap was $10,000. Both parties wanted to keep the deal together. The listing agent suggested a compromise – the seller would come down $5k, and the buyer would cover $5k. They amended the contract price to $500,000. The buyer brought an extra $5,000 cash to closing, and the seller effectively “lost” $5,000 from the agreed price. Both were satisfied enough, and the home sale closed on time. According to the seller’s agent, this was a “typical example” of handling a low appraisal, with both sides accommodating each other to make the sale happen.
Buyer Uses PMI to Bridge a Large Gap: A buyer in Carroll County found her dream home and agreed to $395,000. The home appraised at $365,000, a $30,000 shortfall. The seller agreed to knock $5,000 off the price (down to $390k), but that still left a $25,000 gap for the buyer to cover. The buyer was already planning to put a significant down payment (~$79k). Her lender proposed a solution: instead of putting the full $79k down, she could put down $54k (which is about 14% of the new $390k price) and take a slightly larger loan that requires PMI. This freed up $25k of her cash to cover the gap. The PMI was only about $60/month, and with her excellent credit and low debt, the lender had no issue approving this. She accepted this solution – effectively financing most of the gap. The deal closed, and because the market was rising, within a year the home’s value increased enough that she could remove PMI. In retrospect, she’s very happy – she got the house and didn’t feel the sting of the $25k because it was rolled into the loan. Lesson: a creative loan restructure can solve a big appraisal gap if the buyer has good financials.
Buyer Taps Emergency Savings When Seller Won’t Budge: A first-time buyer in Baltimore County agreed to pay $300,000 for a house. The appraisal came in at $288,000, $12k low. The buyer, who had an appraisal contingency, asked the seller to drop the price. The seller felt the price was fair and only agreed to come down $4,000, to $296,000. That left an $8,000 gap. The buyer really loved the home (location, size, everything was right) and didn’t want to restart the house hunt. After deliberation, he decided to dip into his emergency fund for that extra $8,000 to make the deal work. It nearly depleted his savings, but he had a secure job and plan to rebuild the savings soon. He went through with the purchase at $296k, bringing the additional cash. In hindsight, he has no regrets because the home’s value has already increased and, more importantly, it’s the home he wanted. This scenario shows that sometimes buyers will stretch financially to cover a gap if the seller only gives a little – it depends on the buyer’s determination and resources. However, it’s not always advisable to wipe out your savings; this buyer made a calculated choice that the risk was worth it.
Appraisal Gap Kills the Deal (Buyer Walks): In Prince George’s County, a home was under contract for $420,000. The appraisal came back at $390,000 (a massive $30k gap). The FHA buyer had little extra cash and invoked the FHA amendatory clause to exit the deal when the seller refused to drop the price to $390k. The deal fell through. The seller had to put the home back on the market. A couple of months later, the seller ended up accepting an offer around $400k. In essence, the unrealistic contract price met reality, and neither side could bridge it initially. The buyer walked away (and found another house later that appraised fine), and the seller eventually had to settle for a lower price with a new buyer. This is a classic case where walking away was the right call for the buyer, as the market proved the home wasn’t worth $420k at that time. It underscores that not every gap can be solved – sometimes it’s telling you the deal was mis-priced.
Deal Saved by Reconsideration of Value: A military family using a VA loan put an offer on a home in Frederick County. The purchase price was $520,000. The initial VA appraisal came in at $505,000. The Tidewater process had been invoked, but still the value fell short by $15k. The buyer’s agent noticed the appraiser didn’t include a very recent sale of a similar home that closed just a week before the appraisal at $525,000. They quickly filed a Reconsideration of Value with the VA, including that comp and a detailed explanation. Within about a week, the VA revised the appraisal to $520,000 – matching the purchase price. The VA agreed that the additional comparable supported the higher value. The sale then proceeded with no changes to price or terms. This case illustrates that appraisal appeals can work, especially under VA’s system, when there’s solid data to back it up. It was a relief for both buyer and seller, who were prepared to split the difference had VA not adjusted it, but thanks to the appeal, neither had to lose money.
Maryland Buyer Waived Appraisal and Got Lucky: A competitive situation in Silver Spring had a buyer waive the appraisal contingency completely on a $600k offer for a house listed at $580k. The buyer was nervous knowing they might have to cover a gap. When the appraisal was done, to everyone’s surprise it came in at $600k (the appraiser found enough high comps). The buyer exhaled in relief – they didn’t have to pay extra. While it ended well, this story (shared by their agent after closing) shows the gamble of waiving appraisal. The buyer had some backup funds, but not a lot, and they could have been in trouble if, say, it came in at $570k. In Maryland’s hot markets, plenty of buyers waived contingencies and hoped for the best. Some, like this one, got lucky with a supportive appraisal. Others did not and had to scramble. So, while not exactly a “lesson” since luck isn’t a strategy, it’s a reminder that outcomes vary, and one should ideally prepare for the worst even when hoping for the best.
Seller’s Pre-Emptive Appraisal (Preventing a Gap): A seller in Baltimore City was concerned their unique rehabbed home in a transitional neighborhood might not appraise at the contract price they were aiming for (~$350k). Before listing, they actually paid for their own professional appraisal, which came in at $340k. They listed at $349k and got an offer at $350k. Knowing the appraisal risk, they showed the buyer agents the pre-listing appraisal supporting $340k to set expectations. When the lender’s appraisal happened, it indeed came in around $345k. Because the buyer and seller were already psychologically prepared (they’d seen the private appraisal), they smoothly negotiated a $5k price reduction to $345k and closed the deal. In this case, the seller’s foresight in obtaining an appraisal helped set realistic expectations and reduce surprise. Not many sellers do this, but it can be useful in certain cases. It effectively turned a potential fight into a quick resolution.
Each of these scenarios carries lessons: plan ahead, communicate, and know your limits. Maryland buyers and sellers have found success by being adaptable – using cash, credits, loan tweaks, or simply negotiating in good faith. And when a deal falls apart, it’s not the end; it’s often a course correction that leads to a more viable deal down the line.
Bottom Line: Appraisal gaps can be challenging, but with the right preparation and mindset, Maryland buyers and sellers can overcome them. In a competitive market, expect the unexpected – knowledge is power. Understanding why gaps happen (e.g., rapid price jumps), knowing your options (cover, renegotiate, appeal, or walk), and being aware of your loan’s rules will put you in the best position to handle a low appraisal. Lean on your real estate agent and lender for guidance; they’ve likely seen these scenarios before and can offer creative solutions. While Maryland has seen its share of appraisal gap drama, most transactions still find a happy medium. By staying informed (as you now are) and remaining flexible, you can navigate appraisal hurdles and successfully close on your Maryland home sale or purchase.