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Bank Valuation: Why do I need one? What can I do if it comes back low?

bank valuationIf you’re looking to buy a home or currently exploring your refinance options, it’s likely that the lender will want to order a valuation on the property. Here we explain what a valuation is, why it’s necessary and what options you might have should one come back lower than you expect it to.

 

What is a valuation?

A valuation is an assessment of a property’s value – for mortgage purposes only. Valuations are used to determine the Loan To Value Ratio in a loan application and can impact the amount that a lender is willing to lend you. 

 

Why does a lender need to do a valuation of my property if I’m refinancing?

It would be great if a lender would just take your word for it with regard to the estimated value of your property, but it doesn’t quite work like that.

If a lender is going to use your property as security for your new loan, it makes complete sense they want someone independent to value your property.

 

Why does a lender need to do a valuation of my property when I’m buying property and paying market price?

We all want to believe that the amount we pay for a property equals what it’s worth! And whilst this may be true in the majority of cases, a lender needs to confirm this via a valuation – simply to ensure they’re not lending you $500,000 for a property that’s only worth $300,000.

 

What happens if the valuation comes in lower than expected?

If a valuation comes in lower than expected, it doesn’t always mean your plans will be derailed. How much of an issue it may cause, will depend firstly on whether you’re purchasing or refinancing.

Then, there’s other factors to consider too – as we outline below.

 

What happens if I’m refinancing and the valuation comes in low?

If a valuation comes in lower than expected, but you can still proceed with your planned refinance, then maybe it’s not really a big deal. A valuation is required simply to confirm to the lender there’s sufficient equity to secure your new loan. If there’s enough equity for the new loan, but the value is less than what you were expecting, then perhaps the only thing impacted is your ego.

If a low valuation results in not enough equity to proceed with the refinance, then we need to explore your options. Depending on the type of valuation conducted, sometimes there’s an opportunity to upgrade it to a Full Valuation –which often provides a more thorough assessment of a property’s value.

A Full Valuation is where a valuer will physically inspect your property. They will take room measurements, confirm the condition of the property, as well as review confirmed sale prices of properties similar to yours.

If a Full Valuation returns a less-than-desirable result, sometimes you can order a valuation with a different lender. Each lender has their own panel of valuers and sometimes ordering a valuation through a different lender can produce a different result.

If a few valuations produce the same result, you may need to wait until property prices have increased in your area before proceeding with your refinance. Alternatively, we may need to revise the lending strategy to find another way to help you achieve your objectives.

 

What happens if I’m buying property and the valuation comes in low?

Whilst we don’t see this happen very often, let’s talk about what happens when it does. If a valuation comes in low for a property you’re buying, the best course of action will depend on the following:

  • How much do you love the property? How long do you intend on holding it?

You may already suspect you’ve offered more than what the property is worth (according to a bank valuation, that is), but you’re O.K about it because you really want this particular home. If you intend holding onto the property long term and you’re confident that the market will rise over this time, then perhaps paying a little more for the property now is not such a big deal. Of course, this will also depend on how low the valuation has come in!

  • Have you purchased the property at auction? Have you placed a ‘subject to finance’ offer?

If you’ve exchanged on a contract at auction, you are legally committed to proceed with the purchase which means we need to find a way to make the finance work, regardless of the valuation result.

Something to keep in mind with auction purchases – we rarely see valuation for auction purchases come in low. The reason for this is that the market itself (via the auction process) has determined the market value of the property.

If you’ve submitted a ‘subject to finance’ offer and the valuation comes in low, you have the option to revise your offer, or simply rescind it.

  • Do you have enough money to complete the purchase, in light of a lower valuation?

A lower valuation result often means you can’t borrow as much money. This is because a lender will use the lower of the purchase price or the valuation to determine the Loan to Value Ratio.

If you can’t borrow as much money to purchase the property, you will need to contribute additional cash. Otherwise, the Loan to Value Ratio will increase – which could put you into Lenders Mortgage Insurance territory.

  • Do you qualify for finance with another lender?

Each lender has a panel of valuers they use and as already mentioned, sometimes a valuation returned by Valuer A (for Lender A) is not the same as a valuation returned by Valuer B (for Lender B). As such, if you qualify for finance at an alternative lender, there may be the option of ordering a different valuation with a different lender to see the valuation comes in higher.

 

The house next door sold for $700,000 last week and it’s very similar to ours… so why is a valuer saying my property is only worth $670,000?

It’s important to realise that a bank valuation is conducted for bank purposes only and should not be relied upon for anything else. Plus, it does not indicate what you could achieve if you were to put your property on the market.

We also need to think about the way valuations are conducted. As part of the valuation process, a valuer will review recent property data looking for confirmed sale prices of properties similar to yours. Analysing this more closely, the valuer will make a judgement as to whether your home is superior (i.e. worth more) or inferior (worth less) than each of these properties to determine an estimated value of your property.

The valuer can only use confirmed sales figures – i.e. sales that have actually settled. Settlement is when the sale has been completed and the buyer has the keys to the property. Since this can happen up to one – or even two months – after the ‘sold sign’ goes up, it essentially means the comparison sales used by valuers can be one-two months out of date.

When house prices are increasing quickly, this time lag can help to explain why valuations – for refinances especially – sometimes come back lower than what you may be expecting.

And whilst there’s not much you can do to improve your chances of getting a favourable valuation (since it’s largely based on the value of your land), here are a few tips if you’re expecting to welcome a valuer into your home shortly.

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