Why is an appraisal required for a loan?
Lenders use the appraisal to determine the appropriate loan amount. Because home values can vary considerably, even in the same neighborhood, it’s important for the lender to have an objective opinion of value for the home before making a loan. A lender will not lend more than the market value of a home and the appraised value is used to determine the amount of the loan.
Occasionally buyers are extremely motivated to purchase a home and are willing to pay above market value. When this occurs, the bank still needs to know what the typical value they could reasonably expect to get for the home from a typical buyer. Just because one person is willing to pay above market value, doesn’t mean the market as a whole would value the property as highly.
The bank will then make the loan based on the market value of the home, NOT the purchase price (because that can fluctuate based on buyer and seller motivations.)