Unless you have a pot of gold sitting around, chances are that you will have a mortgage on any home that you purchase.
Lenders require an appraisal of the property before they will loan you the money to buy the house – it’s just smart business because it allows the lender to ensure that the property is actually worth the amount of money that is being loaned to you.
In the past, lenders could choose an appraiser that was familiar with the neighborhood that the home is in, typically resulting in an extremely accurate appraisal due to the appraiser’s experience in and knowledge of that particular market. Recently, however, the guidelines were changed so that appraisers are randomly assigned to appraise any given property – this means that the appraiser might be from another city and have absolutely no familiarity with the market conditions in your new home’s neighborhood. This can sometimes mean that the appraisal comes in on the low side.
So what happens if the appraisal is lower than the loan amount? Well, your options are limited. If the seller won’t agree to reduce the purchase price, then the buyer can either pay the difference between the appraisal and the loan amount, or terminate the contract (assuming that the buyer is still within the financing contingency).
