What are the practical implications for a home buyer when a house is appraised at lower value than asking/offer price?

Question

I know that a house being under-appraised can really screw things up trying to close on a home, but why/how so?

In: Economics

Answer 1

If the house under appraises, then the buyer might need to come up with more cash in order for bank to fund the purchase.

Say they were buying a house for $500k, with $50k down and a bank loan for $450k. But appraisal comes back at $475k. Now, bank doesn’t want to lend $450k on a $475k appraisal, since that’s more than the 90% loan to value they’d agreed to (94.7%). So the buyer either needs to pay more as down payment to get loan down to a 90% LTV, or the seller needs to reduce their price.