What must be factored in when determining the loan amount for a property with a lower appraised value than the purchase price?

When determining the loan amount for a property that has a lower appraised value than the purchase price, it is crucial to factor in the lower of the two values, which is the appraised value. This is because lenders base the amount they can offer for a mortgage on the appraised value of the property, ensuring that they do not overextend themselves with a loan amount greater than the actual worth of the asset.

If the appraised value is lower than the purchase price, it signals that the property may not be worth what the buyer agreed to pay, which can present a risk to the lender. As a result, lenders will generally limit the loan amount to the appraised value, as this provides a safeguard against the possibility of the property not appreciating as expected or even diminishing in value in the future. By doing so, the lender ensures that they retain a financial cushion and mitigate potential losses.

Choosing the higher of the purchase price or appraised value would not be prudent for the lender, as it goes against the principle of lending based on assessed worth. Opting for the average or a maximum permitted loan amount does not accurately reflect the actual valuation and risk associated with the property, which may lead to overthinking the risk and ultimately be detrimental to