When Your Appraisal Comes In Low

First in a series of articles addressing mortgage lending challenges...

You find the house of your dreams.  You sign a purchase and sale agreement containing a mortgage contingency, which allows you to get out of the deal and get your deposit back if you are unable to secure a mortgage commitment by a certain date.  You apply for your mortgage with a lender who has no doubt told you "no problem" and may even already have given you a pre-approval letter.  You think the process is just a formality.  Well, beware, my friends, because in today's residential mortgage lending industry, there is no such thing as an easy process.  One of the pitfalls along the way could be the scourge of the low appraisal.  If the appraisal comes in lower than the purchase price, and you intended to borrow 80%, your loan amount will be reduced in order to maintain an 80% loan-to-value ratio, meaning you have to come up with more cash to close.  You may not have the extra cash, or you may have earmarked it for some other purpose.  Yet, your lender has issued a loan commitment letter (though for the lower amount), so the seller argues that the mortgage contingency is satisfied.  What are you to do?
This article http://www.nytimes.com/2013/09/15/realestate/when-appraisals-come-in-low.html?emc=edit_tnt_20130912&tntemail0=y&_r=0 in the New York Times talks about your options with the lender.  As a buyer's attorney, I would always try to include in the purchase and sale agreement some language requiring that the property appraise for no less than the purchase price.  I also include language stating that if the appraisal is lower than the purchase price, the seller has the option to reduce the sale price to the appraised value or some other amount mutually acceptable to the buyer, and if they are unable to come to terms, then buyer can terminate and recover the deposit.  Without this protective language, a buyer might find themselves in a squeeze.