Before you begin shopping for a home to buy, it is important to get preapproved for a home mortgage. This preapproval will guarantee you a mortgage loan, as long as you meet the conditions listed on the preapproval; however, it is very important to understand how an appraisal of the home you want to buy may affect your ability to get a loan on the house.

Why an appraisal is needed

The first thing to understand is that your lender will require an appraisal of the home you want to buy. This is always a requirement for a home loan, and it is required as a way of protecting the lender. Lenders want appraisals because they show the fair market value of homes they are issuing loans for. A lender will not want to issue more money for a loan than a house is worth, and they base the amount they will lend on the amount of the appraisal.

How this works

Depending on the loan you get, there is a good chance that you will only be able to borrow 80% of the home's value, and this value is based on the appraisal. For example, a lender will loan you $160,000 on a home that appraises for $200,000. You will know this in advance, and this will help you plan out having a big enough down payment for the house.

This will work out great if you have $40,000 on hand for your down payment and if the appraisal on the house comes in at $200,000. The problem you may encounter will only occur if the appraisal comes in lower than this.

The outcome options with a low appraisal

If you made an offer on this house for $200,000 and the appraisal comes in at $180,000, there will be some problems with the loan. First of all, the bank may only agree to lend you $144,000. If you still go through with buying this house, you would need to come up with $56,000 for your down payment. If you do not have this much, the deal may fall through.

The other thing to consider is do you really want to buy a house for $200,000 if it is only worth $180,000? In most cases, you can get out of the contract to buy the house if the appraisal does not come in high enough.

If you have any questions about home loans or appraisals, you may want to contact a lender or home mortgage broker today.