Central Mortgage Blog

Generally the fair market value of a property is determined by an appraisal. There is one important exception,
However. When the proceeds of a mortgage loan are used to buy the same property that is securing the loan, then that mortgage is known as a “purchase money loan.” If the appraisal comes in lower than the purchase price in a “purchase money” transaction, then the lender will use the lower of the purchase price or appraisal.
Mortgage broker’s are often asked by real estate agents and buyers to base their loan on the appraised value rather than the purchase price. Their claim is that they have negotiated a super deal and that the property is worth more than what they are paying for it.
This may be so, but “generally untrue,” but lender’s also will base their maximum loan on the lower of purchase price or appraisal.
The lender’s argument is that an appraisal is really no more than an estimate of fair market value, no matter how competent or conscientious the appraiser may be. The only true indicator of value is the marketplace in which “willing buyer and willing seller,” each in full knowledge of the salient facts, neither with undue pressure, agree upon the selling terms. If the property sells for “x,” then it is probably only worth “x.”