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
The main problem with lower appraisals is that it can impact your ability to get a mortgage.
Banks don’t like loaning you more money than a house is worth because the risks are too high. If you fail to pay, and bank seizes the house, they can’t guarantee that they can sell it for enough to pay off the loan.
So if your down payment isn’t enough to account for the overage in sale price you may not qualify for the mortgage, will lose the bid, and will lose out on any deposit or fees.
For the sake of argument lets say you put $50,000 down on a house appraised at $500,000 (or 10% down) but the sale price ends up going to $550,000 because of a bidding war. Remove your down payment and the mortgage is for $500,000. The bank will treat this as a mortgage with zero down payment and can deny the loan.
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