Mortgage Valuations – A Necessary Process
Property valuations are a necessary part of the home loan application process and are used to confirm the security value of a property being put up in a mortgage loan application. Property valuations are therefore carried out whenever you apply to borrow money to purchase a new property, and when refinancing to get a better deal, or to access the equity you have in your home. The lender will usually authorise property valuations to be carried out and they will also usually cover the cost for the valuation, because they can recoup this cost by charging you an establishment fee, to be paid at settlement.
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How is a Property Valued?
In assessing a property’s value, a licensed valuer will measure the size of the property, record all relevant details such as the number of rooms, the type of fixtures and fittings and if any improvements have been carried out. Other attributes that will also be taken into consideration will include the following:
- The local council zoning and if there are any restrictions in the town plan that will affect future improvements being carried out on the property.
- Vehicle access and if there is a closed in garage, if so, what size.
- The location, views, accessibility to shopping centres, sporting arenas, park lands, schools and other amenities valued by those in the neighbourhood’s demographic.
- The structure of the building and its present condition and any building or structural faults.
- The standard of presentation and general finishes around the home.
The valuer will consider all these attributes equally, and look at any sales which have occurred in the same area in recent times of similar properties, and take into account the general market conditions. The valuer will then put together a detailed valuation report, and submit that to the lender. In the instance that you are having your property valued before considering improvements or before selling, you will receive a copy of the valuation report.
Why is a Property Valued?
Valuations should not be confused with appraisals, which are carried out by real estate agents. A licensed valuer bases their property valuations on hard evidence which will stand up to legal scrutiny, whereas estate agents are acting on behalf of the vendor, and are looking to obtain the highest price possible. The cost to build a home, or the price being asked for a property that is for sale, does not always reflect its true value. However, it is not uncommon for real estate agents to exaggerate the real value of a property, or for a potential buyer to be misled by a seller who is pushing their particular property above that of the general market price in the area because they have recently finished expensive renovations.
When lenders request property valuations, it is to protect themselves, rather than to help the home buyer determine whether they have paid the right price for their new home. Lenders will base the amount of money they are willing to lend on the valuation, less the amount of deposit they require. Lenders do this so that they can be satisfied that if you default in your repayment of the mortgage loan, they will be able to foreclose and sell the property and the sale price they will get will exceed the remaining principle loan amount.
In the past it was a simpler process to obtain home loans for amounts which were very close to the actual valuation of the property, and this risk was usually secured by the borrower paying lender’s mortgage insurance (LMI). LMI is more commonplace on home loans since the Global Financial Crisis, during which banks around the world were stuck with customers who couldn’t pay, and properties which weren’t worth as much as the remaining loan principle. Therefore, while you may only need to supply a five or 10 per cent deposit, you will usually have to pay LMI to secure this high loan to value ratio.
Property valuations can be valuable for a home buyer, especially if the asking price for the home has been inflated by the seller or the real estate agent. If you find this is the case with the property you wish to purchase, you are able to renegotiate. This is particularly important if you intend to buy into an area which you are unfamiliar with because if the valuation is disappointingly low but you still feel it is worth the price being asked, you will have to ask your mortgage broker to obtain some recent sales figures in the area to assist you in challenging the valuation report, then request a second valuation be undertaken. The final say however, will rest with the certified valuation, and this will determine how much your home loan provider is willing to lend you.
There are some properties that lenders consider riskier than others. If the home you have set your heart on buying is one of these you may have to look further afield than the average mainstream lender. This is where the services of a mortgage broker will be required, if you are looking at buying, a large acreage, rural property, units above shops or a hobby farm.
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- Home Loan Finder Property Valuation Awards 2010
- Purchase Below Market Value – A Favourable Sale
- Property Valuation Services | How to Assess the Value of a Property
- How to Value Commercial Property
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