A buyer and seller can agree any price they like, but the lender will advance against its own valuation. That figure quietly determines whether the agreed price can actually complete.
The lender is valuing its security, not the deal
A mortgage is secured on the property, so the lender needs to know what the asset would realise if it had to be sold. The appraisal exists to answer that question.
It is not an assessment of whether the buyer is paying a fair price or of the property's condition in the way a survey would be. Its purpose is narrower than buyers usually assume.
Because the lender's exposure is the loan rather than the price, the appraisal governs the advance and leaves the difference to the buyer.
Comparable sales anchor the figure
Appraisers work primarily from recent transactions of similar properties nearby, adjusting for differences in size, condition and features. Evidence of what buyers have actually paid outweighs asking prices.
This makes appraisals backward-looking by construction. In a fast-rising market the available comparables reflect a period when prices were lower.
Unusual properties are harder to value for the same reason. Where few genuine comparables exist, the appraiser has less evidence and tends toward caution.
The loan-to-value ratio does the constraining
Lenders advance a proportion of value, and that proportion is applied to the lower of the price and the appraisal. A shortfall in the appraisal reduces the maximum loan directly.
The buyer must then bridge the gap with additional cash, renegotiate the price, or withdraw. The deposit required rises by the full amount of the shortfall.
Crossing a loan-to-value threshold can also change the interest rate offered, so a modest valuation shortfall sometimes has an effect larger than the shortfall itself.
Appeals are evidence-driven and narrow
Most lenders allow a valuation to be challenged, but only on the basis of factual error or additional comparable evidence the appraiser did not have.
Disagreement with the conclusion is not grounds on its own. Successful challenges usually supply specific recent transactions that were genuinely comparable and were omitted.
Where the valuation stands, some buyers approach a different lender, since a fresh appraisal may reach a different figure using the same evidence.
What the constraint does to a market
Because appraisals lag transactions, they act as a brake on how quickly agreed prices can outrun recorded ones. Financed purchases are held closer to evidence than cash purchases are.
In falling markets the same lag works the other way, supporting valuations above where new transactions are settling for a period.
The mechanism is not a judgement on value so much as a requirement that lending be anchored to observed sales rather than to sentiment.