What occurs in the situation of a low appraisal related to FHA/VA financing?

In the context of FHA and VA financing, a low appraisal can significantly impact the transaction. When an appraisal comes in lower than the agreed purchase price, it indicates that the property is not worth the amount for which the buyer and seller have contracted. This situation typically allows the buyer to back out of the contract without penalty and receive their earnest money back.

The rationale behind this is that both FHA and VA loans have specific guidelines that protect buyers in such circumstances. These government-backed loans require that the property appraises at or above the contracted price to ensure that lenders do not finance more than the property's value. If the appraisal falls short, the buyer's ability to secure financing becomes jeopardized because lenders are unwilling to lend more than the appraised value.

This system of protecting the buyer ensures that they are not forced to proceed with a purchase that may not be financially sound, allowing them to receive their earnest money back under these conditions. The other options do not align with typical outcomes in such scenarios; thus, they do not apply.