Many lenders now do not require 20% and a semi-decent borrower can get it down to 3-5%. I recently closed on a house with Garden State Mortgage and I got 5% down and the lender covered much of the closing costs. Of course, if you are under 20% you will get hit with PMI costs every month until you achieve 20% equity.
Now I am trying to sell my old house and everyone is asking for seller concessions. Two friends I know also received money from the seller to cover their closing costs. However, the seller concession will appear on any closing docs and a large seller concession which goes beyond the closing costs will raise red flags with the lender.
As you do point out, this can create problems with the appraisal since no bank will offer more of a loan than the house is worth and that is where this approach can fall apart.
