2)You can either renegotiate with the seller, or come up with more. Obviously, you will want to renegotiate with the seller to lower the price down to the appraisal. But one other option not mentioned yet is that if you know that very recent comps have sold for what you agreed to, you can read the appraisal and see if they used them. If they didn't, you can possibly get them to include them, but the chance is higher if they haven't sent out the final report yet. If they did, kiss that bank goodbye, get another appraisal and point out the comps beforehand - and perhaps get a discount since you did their work for them- then line up another bank, since gauranteed the fist one won't budge in this climate.
But only do all this if the seller is reluctant to budge and you really really really want this place.
If it were me, I would walk, but it might be your dream home.
You have several choices at this point: Put down more cash and lower your mortgage amount; tell the seller you will only purchase at the appraisal price; ask the seller to split the difference with you and put down a little more money.
Banks hire their own appraisers and that is whose numbers they use.
The property you purchase, although a long term investment, is going to be your home. The value of the home for your purchase purposes should be equal to how much you want to live there.