To be honest, in today's market a home's appraised value is unlikely to fall short of its sale price. It can happen, but buyers and sellers are more savvy about "the going price of a home", and the U.S. housing markets have exhibited steady growth since 2011. These factors are something that home appraisers are likely to consider when assigning a home's Fair Market Value.
Knowing a home's Fair Market Value, can help set the downpayment amount on a purchase. Mortgage lenders use home appraisals as the "value" portion of the your mortgage's loan-to-value (LTV) calculation, where "value" is equal to the lower of your home's purchase price or its appraised value.
If your home appraises for less than its sale price, there are three potential outcomes :
• Buyer and seller renegotiate a new, lower home sale price
• Buyer increases downpayment to meet new LTV and downpayment minimums
• Buyer chooses neither option, and cancels home purchase contract
The possibility of a "bad appraisal" is one of the reasons why the most home purchase contracts are written with an appraisal contingency. In the event that the home fails to appraise for its purchase price, the contingency clause gives buyers an opportunity to re-evaluate. Protecting the buyer.
Appraisal contingencies can also be used to renegotiate or exit contracts if an appraiser identifies required home repairs, such as chipped paint or cracked windows.
If you plan to buy a home consider your household budget and your expected home downpayment. An appraisal can change your math, and so can rising home prices. It's best to know how much home you can afford -- it's free and there's no obligation whatsoever.
