I hear this often, especially on refinance applications. Sometimes it happens on a purchase when the sellers have the price of the home higher than the market will bear. Other times, it happens when a home buyer is asking the seller to pay closing costs on the purchase and they agree to increase the price to offset the closing costs so the seller will net the same after paying off their mortgage and sales costs. This is a common event in a hot real estate market such as the Treasure Valley.
The purpose of the appraisal is to establish the value of the property being secured by a mortgage. The lender needs to know the current value of the property so in the event of foreclosure, the property is worth more than the amount owed by a borrower. For a refinance application, it usually means a lower loan amount to reflect the lower than estimated home value. For a purchase transaction, the following options apply:
If the value is lower than the purchase price, the buyer has the option of either bringing the difference to closing (not the best choice, IMO) or negotiating a lower purchase price with the seller. Sometimes a compromise such as lowering seller concessions like closing costs while lowering the purchase price will spread the difference between both parties. It comes down to how much does the buyer want THAT property or how motivated the seller is to sell their property. Other times, I have seen both parties walk away from the transaction. In the case of FHA loans, the seller signs a document letting the buyer out of the contract and return earnest money if the property doesn’t appraise for the purchase price on the contract.
For a home seller accepting an FHA offer, be aware that FHA will log the appraised value in their system, and even if you turn down a counter offer lowering the sales price, FHA will recognize this value for the next 180 days. Another appraisal or lender cannot get a higher value regardless of the result of a new appraisal. If you or your agent feel you are at the top of the market price for homes like yours, you should not try to increase the price to pay a buyers closing costs. There are options for buyers who need closing costs or down payment assistance.