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How is a property valued in a home loan?

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A property valuation, also known as a property appraisal, is a critical part of the home loan process. It’s an assessment of a property’s worth in the current market and is used by lenders (banks or other financial institutions) to determine the amount they are willing to lend for a mortgage, known as a home loan.

Here’s how it works.

When you apply for a home loan, the lender needs to be confident that the property you’re buying is worth at least as much as the amount they’re lending. This is because, if you are unable to meet your loan repayments, they may need to sell the property to recover their money. Therefore, they require an accurate estimation of the property’s value.

To get this estimate, the lender will typically engage a professional valuer. The valuer will visit the property and assess it based on a variety of factors, including its size, condition, location, and features. They will also consider the prices achieved in recent sales of comparable properties in the area to help determine its market value.

Once the valuer has completed their assessment, they will prepare a report that includes their estimate of the property’s value. The lender will then use this valuation to determine the maximum amount they are willing to lend, often referred to as the Loan to Value Ratio (LVR).

If the property’s appraised value is less than the purchase price, the lender might not approve the loan, or they might approve it for a smaller amount. This could mean you’ll need to come up with a larger deposit.

It’s important to note that a property valuation for a home loan is different from a property inspection, also known as a building inspection. While a valuation assesses the market value of the property, a building inspection looks at the property’s condition in detail, checking for any issues that might need repair or could impact the home’s value in the future. Both are important parts of the home buying process, but they have different purposes.

Different lenders use a range of different methods when valuing properties to act as security for mortgage loans. These include:

  • Fully executed property contract of sale that shows the Purchase Price
  • Desktop valuation – an estimate of the property value based on a range of available information without actually physically viewing the property.
  • Drive-by valuation – an estimate of the property value carried out by a qualified real estate valuer. The valuer views the property but does not enter the property.
  • Full Valuation – an estimate of the property value carried out by a qualified real estate valuer. The property is physically inspected by the valuer as part of the assessment.

Lenders typically use a combination of the above methods, depending on the type of mortgage loan product being offered.

You should also be aware that the valuation may differ from the purchase price.

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