Despite house valuations being an essential part of almost every home loan application, many people are often unaware of their purpose, how they work and the role they play in getting your home loan approved so here’s some insight from HomeStart CEO, John Oliver.
In simple terms, a valuation is one of the primary tools used by financial institutions to determine how much they will lend to you for mortgage security purposes.
A common term you will hear is the loan to valuation ratio o
r LVR for short.
The LVR is important because it determines the level of protection the lender has in the event you default on the loan and the property must be sold.
Generally most financial institutions will lend up to 95% of the valuation which gives them a buffer in the event of default. However, where loans are in excess of 80%, Lenders Mortgage Insurance
is usually required to be paid by the borrower to cover the lender for the increased risk of providing that loan.
It is important to understand that the valuation is being done for your lender, not for you. Your lender will organise this and the cost is usually included in the loan establishment fees and charges.
Some lenders may charge separately but will probably have a lower loan establishment fee so find this out when comparing various lenders’ fees.
Valuations are completed by a licensed valuer. In determining the value of a property, the valuer will take into consideration a range of factors including general location and council zoning, house and land size, internal features and improvements in the house, number of rooms, bathrooms and vehicle access to the property.
The type of building structure and condition of the property are also important factors. In addition to all that, the valuer will also take into consideration recent sales of similar properties in the vicinity.
It is also important to understand that a bank valuation may not be the same as the purchase price of a house. An assumption behind the notion of all valuations is that there is an active buyer and seller in the market who agree on a price without any undue influence. That price though does not mean that is the value of the property for a lender.
In some instances the valuation could be 10 per cent (or even more) below the purchase price based on the valuer’s assessment of the property, the market and the fact that sometimes people pay too high a price for a property.
It’s rare to find a valuation in excess of the purchase price although it does occur, for example where there is not an arm’s length relationship between buyer and seller; like a sale between family members.
Valuations are a critical part of the lending process and at times can be a most emotive one particularly if there are discrepancies between the price paid and the valuer’s valuation which results in a lower loan amount being available.
The valuation is however also protecting your interests, even if at times it may not seem like that. If a lender was to provide an applicant with more money than a property is worth, it could put the mortgage holder in long-term financial difficulty should their personal circumstances change and the property needed to be sold.
So, when you’re looking to get started towards home ownership, understand the purpose of a valuation and think of it as further peace of mind in your journey to home ownership.