A real estate appraisal is a professional, independent opinion of a property's market value conducted by a licensed or certified appraiser. Lenders require an appraisal on virtually every mortgage transaction to confirm that the property's value supports the loan amount — protecting both the lender and (in theory) the borrower from overpaying. The appraisal report is the lender's primary tool for verifying collateral value.
When Appraisals Are Required
Appraisals are standard for: purchase mortgages (to confirm the sales price is supported by market data), refinances (to determine how much you can borrow against current market value), home equity loans and HELOCs, and estate planning or divorce proceedings. Some streamlined refinance programs (FHA Streamline, VA IRRRL) waive the appraisal requirement. Cash buyers are not required to obtain an appraisal but often choose to for peace of mind.
How Appraisers Determine Value
Residential appraisers primarily use the sales comparison approach: they identify 3–6 recent sales of comparable properties (comps) in the same neighborhood and make adjustments for differences in square footage, bedroom/bath count, lot size, age, condition, and amenities. For multi-unit or income-producing properties, appraisers also use the income approach (capitalizing the property's NOI) and sometimes the cost approach (land value plus depreciated replacement cost). The Mortgage Calculator uses your loan amount relative to appraised value to determine LTV and PMI requirements.
The Appraisal Gap
An appraisal gap occurs when the appraised value comes in below the agreed purchase price — most common in competitive markets where buyers bid above asking price. In this scenario, the lender will only lend against the lower appraised value, requiring the buyer to either cover the gap with additional cash, renegotiate the price with the seller, challenge the appraisal, or walk away if the contract includes an appraisal contingency. In hot markets, some buyers waive the appraisal contingency to make offers more competitive — a significant financial risk that should be approached cautiously.
What to Do If Your Appraisal Comes in Low
If your appraisal is below the purchase price, you have several options: request a reconsideration of value (ROV) by providing the appraiser with additional comps they may have missed; ask the seller to reduce the price; negotiate a split of the appraisal gap between buyer and seller; or increase your down payment to cover the gap. Appraisal errors do occur — comparable selection and adjustment methodology are subjective — so providing well-researched alternative comps is a legitimate first step. The Home Equity Calculator can help you understand how a lower appraised value affects your equity position and LTV.