The loan approval is subject to the approval of the appraisal. The home has to be appraised for equal to the amount that you are borrowing on the property. Since the bank is holding the home as collateral for the loan, they need to make sure it's a sound investment. If you loaned a friend $1000 cash, and they gave you a diamond necklace to hold as collateral, you would make sure the necklace was worth $1000. If your friend never pays back the loan, then you can sell the necklace and recoup your loan investment. Basically the same principal with borrowing money on a house.