Also, a mortgage lender can require an appraisal inspection to be completed on your home before they make their approval decision. Or they will provide you with an approval conditioned on an appraisal report being completed.
The report must support the property’s value declared in your mortgage application. That means you give a property value of $500,000 in your mortgage application. The lender expects the appraisal report to support this property value.
Suppose the appraised value is different from the value declared in your mortgage application. In that case, the lender will re-underwrite the mortgage using the appraised value as the basis of the mortgage calculation.
Let’s say that the lender has offered a loan at 80% of the $500,000 property value, conditional on the home appraisal report. That means the loan amount afforded at the $500,000 property value is $400,000
But if, instead, the appraised value of your home is lower, say $450,000. The lender will use this new appraised value to recalculate the loan amount.
Therefore, the loan amount will be $360,000.
This can be an issue when you are buying a house. Either you will have to negotiate with the seller of the home to lower the price of the house, or you will have to come up with the $40,000 shortfall ($400,000 – $360,000).
On the flip side, if the house comes in higher than the value you provided in the mortgage application, say instead that the appraised value is $550,000.
You can use the increased value of the property to either increase the loan amount (if you qualify for a high loan amount) or reduce your down payment.
