Usually, individuals applying for a loan are only interested in obtaining the loan and unfortunately are not worried about the prudence of buying the property at the agreed price.  In fact, many purchasers will try to encourage appraisers to increase the appraised value so that they can purchase the home regardless of its value.

The majority of real estate appraisals are required by mortgage companies to validate the property's purchase price for loan purposes.  Except for periods of very low interest rates when everyone is refinancing, most loans are for the purchase of real estate and ordered after a sale price is negotiated.  Often buyers assume that the lender is looking after the buyers' interests in the purchase transaction.  This is not the way it works.

The law states that if the mortgage company orders the appraisal, the appraiser is responsible only to the mortgage company.  We expect mortgage companies to be cautious, and that means protecting their interest, not necessarily the purchasers'.

The lender considers the loan based on the following:

• The lender has two sources of repayment: the purchasers' incomes and the potential sale of the property should the buyer default.
• The responsibility to repay the loan is not based upon the property's value, so the purchaser is obligated to pay the note even if the property value declines to zero.
• The loan may be insured or guaranteed by a government agency.
• The government does not promise to pay the purchasers' debt if the appraised property value differs from actual saleable value.
• If the loan is greater than 80% of the value, private mortgage insurance may be required on a portion of the loan.
• There is no decrease in risk for the purchasers regardless of the loan-to-value ratio. The investment by the purchasers is the same, a mixture of personal cash and a loan they must repay.