I am a first time home buyer in San Diego, CA and was curious on the exact impact of Appraisal on a loan application. We have placed an offer of 345K on a home here and the comps in the area indicate we are in the ballpark. We are applying for a 3.5% down FHA loan. If the appraisal comes back say 10K less (around 335K), does that mean the lender approves the loan only for the appraised amount? How much margin/tolerance do they keep on the cost estimated by the appraiser i.e do they approve loans in the range 330K to 340K for a, say, 335K appraised home?

The value the lender will use to underwrite the loan is the lesser of the contract sales price or appraised value. If you have an appraisal contingency in your contract then you can walk away from the deal if the appraisal comes in low and the seller will not reduce the sales price. You can also make up the difference in cash.

In today's real estate market, it is quite common for the seller to reduce the sales price to the appraised value. You should consult your RE agent if your appraisal comes in below the contract price to see what your options are.