 Dear Dr. Don,
If the purchase price differs from the appraised value, which figure will be used to determine the loan amount, and why?
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Glenna Good-Faith
 Dear Glenna,
When you're financing a home purchase, the lender uses the lower of appraised value or the purchase price. Appraisals protect the lender from taking on too much risk when originating the loan.
Sometimes, the purchase price is lower than the appraisal. Nonetheless the purchase price still represents the fair market value of the property. So, a lender shouldn't use an appraisal that comes in above that price to determine how much it is willing to lend the homebuyer. In other cases, the appraisal comes in below the purchase price. In such situations, the lender will lend up to the appraised value. The lender doesn't want its risk position based on what you're willing to pay for the house. Rather, the lender wants to risk no more than the fair market value as determined by an independent appraisal. Refinancing is a different situation because there is no sales price associated with the home. Factors that drive an appraisal include the appraiser's choice of either a comparable-properties or cost approach, and the particulars of your home. It's important for appraisers to maintain their independence in establishing the appraised value. An inaccurate appraisal can increase the risks faced by both the lender and the homeowner. |