I'm planning on making a horror game of some sort and right now looking for an engine. I need something that will have good night time lighting effects for "atmosphere". Anyone got any ideas on what is a good engine for this type of game? It needs to be free or a reasonably priced for a hobby developer. Thanks in advance.

Well what programming languages are you fluent in?

C++

Are you looking for a graphics engine or a game engine?

Are there any specific effects that you're looking for?

To a large degree, the quality of the night-time lighting will come down to your artists rather than the actual engine.

graphics or game engine doesn't matter. Also i know good artists are essential. im looking for most importantly good lighting.

There are always professional engines like unreal 3, which will be the best for most scenarios. Buying a license will be a no-go for any indi developer ($500.000++), but if you will make your game as a mod, you will most likely benefit from this kind of engine.

I assume that you will most likely use static global illumination (i.e. no day-night cycle), than a render engine with precalculated lightmaps (+ dynamic lighting for flashlights etc.) will be your best choice (my personal opinion).

Unreal will do the job, in case of saving some money, take a look at ogre(free?), irrlicht(free?) and torque(license just a few $100?).

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Ashaman

A while ago I ran across the c4 engine.
Link
I haven't used it, but the feature set seems rich, and pricing looks ok.