Property valuations play a big part in the home loan process. But it can be confusing when your lender’s appraisal of what your new home is worth is lower than the listing price. So why do lenders and agents value homes differently?
What’s a lender’s valuation?
All home loans are secured on the property being bought. This means a lender can sell your home to recoup their money in the event you default on the mortgage repayments. As such, they need to know how much the home is worth. The property’s value is then used to determine the loan-to-value ratio (LVR) of your home loan application.
A LVR is the amount you are borrowing, expressed as a percentage of the value of the property you’re buying. For example, if you want to borrow $400,000 to buy a property valued by the lender at $500,000, then your LVR is 80%.
Lenders usually err on the conservative side when valuing property as this protects them from financial loss should the property need to be sold to recover your debt.
How an agent values property
A real estate agent assesses the ‘market value’ of a property. This is their professional opinion of how much a home will sell for on the open market. Vendors can use this information to decide the asking price of their home.
The agent’s valuation takes into account:
- The features and benefits of the property
- Local market conditions
- Recent comparable sales in the local area
- How quickly the property needs to sell
As an agent wants to achieve the highest possible selling price for the vendor, their valuation may come in higher than the lender’s valuation.
How lenders value property
Property valuations can be done in different ways, depending on the lender and how risky they think your home loan application is. These include:
- Full valuation: This is the most comprehensive valuation available, commonly used when an application has a high LVR or is deemed risky. In a full valuation, an independent valuer physically inspects the property inside and out. They then assess the local market conditions and any comparable sales prices to determine the home’s value.
- Kerbside valuation: In a kerbside or drive-by valuation, the independent valuer only inspects the property from the outside. They use this alongside sales data and market conditions to estimate the property’s value. Kerbside valuations are commonly used when the loan application is seen to be low to medium risk.
- Desktop valuation: For a desktop valuation, the property is not inspected. Rather the lender or value just refers to comparable sales data to work out how much a home is worth. Desktop valuations are used for low-risk applications with a low LVR.
What if a lender’s valuation comes in low?
As lenders tend to be conservative when they value property, it’s not uncommon for a lender’s valuation to be lower than the purchase price. So what do you do when it comes in too low?
You have a few options including:
- Challenging the valuation: Some lenders let you challenge the valuation if you think it’s too low. However, you will need to provide evidence to back up your claim, such as records of recent sales in the area. You can also ask to see the valuation report to check for any errors or omissions.
- Apply to another lender: Different lenders value property differently, so if one comes in low another lender’s value might be higher. However, applying to multiple lenders can negatively impact your credit score – so it can be a good idea to seek professional advice from a mortgage broker before you apply.
- Borrow more money: You could still go ahead with the deal if the lender is prepared to lend you more money. However, if this tips your LVR over 80% this will mean paying lender’s mortgage insurance (LMI). LMI is a one-off cost added to your mortgage which protects the lender should you default on the home loan.
How a lender’s valuations can affect your LVR
Imagine you want to buy a property for $700,000 and need to borrow $500,000:
- If the lender values the property at $650,000, this gives you a LVR of 77% (500,000 / 650000 x 100). As a result, you won’t need to pay LMI for the deal to go through.
- If the lender values the property at $610,000, this gives you a LVR of 82% (500,000 / 610,000 x 100). In this case, the loan might still go ahead but you would need to pay LMI.