Buying a home is one of the biggest decisions you'll ever make. Not only is it a huge financial investment, but it's also an emotional one. So it's important to do your due diligence every step of the way to ensure that you're making the best decision for you and your family. One of the most important steps in the home-buying process is getting a professional appraisal. An appraiser will inspect the property inside and out and give you an unbiased third-party opinion on what the home is worth. But what happens if the appraised value comes in lower than the contracted price? This is called an appraisal gap, and it's something you need to be aware of as a homebuyer.

An appraisal gap is the difference between the appraised value of a home and the contracted price of the home. And a gap occurs when a home buyer has agreed to a price. But an independent appraiser determines that the home's value is lower than that price. Let's say the listing price of a home is $200,000, and it's a competitive situation. So it escalates up to $240,000. Your contract price is now to 40, 40,000 above the list price and let's say it appraises at $230,000. The gap right there is $10,000. So if you had offered an appraisal gap of $10,000, you would be using the entire thing. If it appraised at $235,000, you would only be using 5000 of the $10,000 gap you had offered. And if appraises at $245,000, congratulations, you have equity. As a general rule of thumb, it's always best to have some cushion in your offer so that you're not left scrambling if there ends up being an appraisal gap.

The appraisal process can be daunting for first-time homebuyers. But by understanding what an appraisal gap is and how to prepare for one, you can rest assured knowing that you're making the best decision for your finances—and your peace of mind.