How do property appraisals affect mortgage amounts and approval?

A property appraisal is more than a required checkbox in the mortgage process — it’s the primary, lender-verified measure of a home’s market value. Lenders rely on that value to set how much they will lend, whether mortgage insurance is needed, and whether the loan terms must change or the loan must be declined. In my 15+ years advising borrowers and working with underwriters, I’ve seen appraisal results make or break deals, shift down payments, and trigger renegotiations.

Why the appraisal matters to lenders and borrowers

  • Loan size and LTV: Lenders set the maximum loan amount based on the appraised value, not just the contract price. The loan-to-value (LTV) ratio = loan amount ÷ appraised value. A lower appraised value raises LTV and can push a loan above an insurer or investor threshold, requiring a larger down payment or private mortgage insurance (PMI). (See our deeper guide on Understanding Loan-to-Value (LTV) and Its Role in Mortgage Approval.)

  • Underwriting and risk: The appraisal is an input to the lender’s underwriting model. If the appraised value is low relative to the loan request, underwriters may require more documentation, a larger down payment, an appraisal review, or may deny the loan.

  • Mortgage insurance and loan programs: Programs like FHA, VA and conventional loans have specific appraisal standards and thresholds. A low appraisal on an FHA loan can change required repairs or require additional borrower funds; on conventional loans it can increase or trigger PMI requirements. Government program specifics are documented by HUD and the Department of Veterans Affairs (VA) and by agency guides such as Fannie Mae’s Selling Guide.

  • Collateral protection: Lenders lend against collateral. If the collateral’s verified value is lower than expected, the lender’s potential loss in default increases — and that directly affects approval and loan sizing.

Relevant authoritative sources: Consumer Financial Protection Bureau (CFPB) explains how appraisals fit into the mortgage timeline and borrower protections (consumerfinance.gov), and agency guidance from Fannie Mae and HUD details appraisal requirements for different loan types (fanniemae.com; hud.gov).

The appraisal process — what to expect

  1. Lender orders appraisal: After you apply, the lender orders an appraisal from an independent, licensed appraiser (or appraisal management company). The appraiser is selected to avoid conflicts of interest.

  2. Appraiser inspects the property: Depending on the loan and market, this may be a full interior/exterior inspection, a drive-by/exterior-only inspection, or an automated/desktop appraisal. The inspection documents size, condition, quality, and notable features.

  3. Comparable sales (“comps”) and adjustments: The appraiser finds recent, similar sales in the area and adjusts values for differences (lot size, condition, upgrades). This is the primary valuation method for most residential appraisals.

  4. Final report and value: The appraiser issues an appraisal report with an opinion of market value and supporting data. Lenders use the value to set the loan amount and underwriting conditions.

Typical appraisal cost: Expect roughly $300–$700 for a standard single-family appraisal in 2025, with higher fees for complex properties, large homes, or rural areas. Desktop or automated appraisals are often cheaper; specialized commercial or unique-property appraisals cost more. Costs vary by market.

Common appraisal outcomes and immediate consequences

  • Appraisal equals or exceeds purchase price: Good outcome — lender funds as applied (subject to underwriting). If the appraisal is materially higher than contract price, buyers gain immediate equity.

  • Appraisal below purchase price: The most common trigger for renegotiation. Options include:

  • Buyer and seller renegotiate the sales price.

  • Buyer brings additional down payment to meet the lender’s required LTV.

  • Buyer disputes the appraisal with additional comps or requests a review/reconsideration.

  • Lender orders a second appraisal or appraisal review (sometimes called an appraisal appeal).

  • Buyer walks away if the contract allows (contingency).

  • Appraisal marginally below price: Lenders may allow partial remedies (e.g., larger down payment) instead of denying the loan.

Numeric example: You contract to buy at $400,000 with a requested loan of $320,000 (80% of contract). Appraisal returns $370,000. New LTV = 320,000 ÷ 370,000 = 86.5%. To restore 80% LTV based on appraised value, the borrower must reduce the loan to $296,000 (80% of $370,000) or increase their down payment by $24,000. Alternatively, the borrower and seller can renegotiate the sale price closer to appraised value.

Appraisal types and modern alternatives

  • Full interior/exterior appraisal (traditional): Thorough inspection and detailed report.
  • Exterior-only or drive-by appraisal: No interior access, faster and sometimes used in low-risk refinances.
  • Desktop appraisal: Appraiser uses public records and photos — faster and less costly, used selectively.
  • Automated Valuation Model (AVM) and appraisal waivers: Lenders may rely on automated models or issue an appraisal waiver for streamlined refinancing or purchase transactions if the automated underwriting systems (AUS) support it. Fannie Mae and Freddie Mac both offer appraisal flexibilities that can waive physical appraisal in certain conditions (see Fannie Mae guidance).
  • Bifurcated appraisals and hybrid models: Inspection and valuation work are split between data collectors and appraisers; used increasingly in 2020s mortgage workflows.

Special rules for FHA, VA, and USDA loans

  • FHA: HUD requires an FHA appraisal that includes property condition and habitability checklist; appraisers must note required repairs for HUD compliance (hud.gov).
  • VA: VA appraisals establish both value and minimum property requirements for veteran borrowers; a low VA appraisal or MPR (minimum property requirements) can stop loan approval (va.gov).
  • USDA: Rural Development appraisals and site inspections look for property eligibility and condition.

These program-specific appraisal rules can be stricter than conventional requirements; consult HUD, VA, or USDA guidance when using these programs.

How appraisal results feed into underwriting and PMI

  • Underwriting: The appraised value is an objective input to the underwriter’s decision. A low appraisal may mean additional documentation (repairs, comps, market data), conditional approval changes, or denial.

  • Private Mortgage Insurance (PMI): For conventional loans, PMI is typically required when LTV exceeds 80% (based on the lesser of sales price or appraised value depending on lender policy). A lower appraisal that increases LTV can trigger PMI or delay PMI removal.

When to challenge or appeal an appraisal

You can ask for an appraisal review or reconsideration of value if you have credible evidence:

  • Better comps that the appraiser overlooked.
  • Recent closed sales that the appraiser did not include.
  • Documentation of permitted renovations or unique features with receipts and permits.

Start with the lender — they initiate an appraisal review or order a second appraisal. The CFPB provides guidance to consumers on appraisal disputes and what lenders must disclose (consumerfinance.gov).

Practical preparation checklist (before appraisal)

  • Declutter and make the home accessible for inspection.
  • Complete small repairs (peeling paint, broken fixtures) and document them.
  • Prepare a list of recent improvements with receipts and permits.
  • Provide the appraiser with a list of comparable homes you think are similar and explain why (but don’t pressure the appraiser).
  • Keep landscaping trimmed and exterior clean; curb appeal matters.
  • If selling, provide the MLS listing packet and any recent work orders.

Common mistakes and misconceptions

  • Mistake: Assuming contract price equals appraised value. The appraiser’s independent opinion controls the valuation.
  • Mistake: Pressuring the appraiser. Appraisers are licensed and required to act independently; undue influence can be reported.
  • Misconception: Appraisers always undervalue homes. Appraisals aim to be objective; while they can be conservative in down markets, they can also come in at or above contract.

When a low appraisal becomes a hard “no”

A lender may deny the mortgage if the appraised value is so low that the loan would exceed program-allowed LTV ratios and no reasonable remedies are available (buyer lacks additional funds, seller won’t reduce price, or no viable comps). In such situations, buyers can seek other lenders, provide more funds, renegotiate, or cancel under contingency.

Useful resources and internal reads

Authoritative sources cited in text:

  • Consumer Financial Protection Bureau (CFPB), mortgage module and appraisal guidance (consumerfinance.gov).
  • U.S. Department of Housing and Urban Development (HUD) appraisal and FHA policy (hud.gov).
  • Fannie Mae Selling Guide and appraisal waivers (fanniemae.com).

Professional note: In my practice as a financial advisor and CPA working with homebuyers and refinance clients, the single most effective step borrowers take is preparing documentation of upgrades and recent comps before the appraiser arrives. That preparation shortens the process and reduces the likelihood of surprises.

Disclaimer: This article is educational and does not replace personalized legal, tax, or lending advice. Contact a licensed mortgage professional, appraiser, or HUD-approved housing counselor for guidance specific to your transaction.