When your home appraises less than the purchase price, how does this affect your mortgage or loan approval? Nearly all lenders, and by nearly all, we mean 99.99% of all lenders, use the lesser of the purchase price or appraised value in the LTV calculation.

When the home appraises for less than purchase price, there is not a negative effect for the borrower in most cases. For example, if you are buying a house for $250,000 and you planned to use an FHA loan with 3% down ($7500), and the home only appraises for $245,000, your 3% down payment becomes slightly over 3%. Conversely, you could also slightly lower your down payment to exactly 3% of $245,000, or $7350.

Where problems typically occur is in the purchase contract. Most borrowers will not want to overpay for a home unless they NEED to have it. A lower purchase price might have to be negotiated with the seller. The lower purchase price might mean that the seller no longer wants to contribute to closing costs for the borrower or maybe they will need to lessen their contribution for those costs.