You have signed a contract to purchase a house. Your potential lender has qualified you for the mortgage loan, on the condition that the house will appraise high enough to support the loan. Now you have learned that the appraisal has come in too low, and the lender is not prepared to commit the loan.

You have a number of options.

Let's take this example. Your contract price is $500,000, and you are seeking a loan which will be 80 percent of the purchase price -- or $400,000. Such a loan will help you avoid paying private mortgage insurance (PMI) premiums. However, the lender has appraised the house for only $480,000, and will only lend you $384,000.

Here are some of your options.

1. Cancel the deal. Read your sales contract carefully. Do you have a financing contingency, and do you still have time to terminate the contract if you cannot get the financing spelled out in the contract? If you have any questions about this, check it out with your attorney. Did you include a contingency for obtaining an acceptable appraisal? Read your contract carefully.

2. Put up more cash. You originally intended to put down $100,000 of your own money and get a $400,000 loan. Since the lender is only willing to lend you $384,000, you can -- if you have the cash and want to use it -- put up the additional $16,000 (or $116,000), and still buy the house. However, if the appraisal is truly accurate, give serious thought as to whether you may have overbid on the price. And don't forget to plug into your equation closing costs -- such as title insurance, recording taxes, title search, etc.

3. Change the terms of the loan. Obtain a first trust in the amount of $400,000, and a second trust in the amount of $16,000. This will help you avoid PMI. Talk with your lender about this; not all lenders like to use this approach.

4. Challenge the appraisal. You have the absolute right to obtain a copy of the appraisal. Read it carefully, and discuss it with your attorney and your real estate agent. You should then talk with the appraiser and/or the lender. If you believe there were errors in the appraisal, demand that the appraiser returns to the property, and reevaluate the situation.

Keep in mind, however, that appraising property is not a science; at best, it is an attempt to determine what a piece of property is worth, based on a number of different methods of evaluation. While appraisers use such benchmarks as square footage, replacement value and other similar concepts, the bottom line in my opinion is that appraising a house is a very subjective exercise. Since no two houses are really similar, there has to be a lot of subjectivity involved in any assessment.

The best test of market value: what a buyer is willing to pay and a seller is willing to accept for the house.