What Is a Bank Valuation Report?
Before a bank agrees to lend money to a homebuyer for a house purchase, they will first want to ensure the property’s value will enable them to recoup their losses if the borrower can’t keep up with their repayments. There are many types of property surveys that buyers and sellers may commission during the sale or purchase of a house; a bank valuation report is one of the most common. The majority of property reports are ordered by and for the property buyers and sellers, but the bank valuation report is different.
Both buyers and sellers have an interest in establishing the actual value of a property. However, the market value of a property is different from the bank value. A market valuation assumes that the seller is looking to secure the best price possible; they aren’t as desperate to sell as the bank will be in the case of a defaulting borrower. In most cases, this is true. Sellers are motivated by the desire to get as much money as possible for their home. On the other hand, the bank is motivated by the need to sell quickly and get the debt off their books as soon as possible.
How do Bank Valuations Differ From Market Valuations
Market valuations are designed to establish how much a seller can expect to receive from the sale of a property. Market valuations allow for the fact that the seller wants to get the best value possible and will negotiate with buyers accordingly. However, when homeowners default on their mortgage payments, it takes some time before the bank can take possession of the home and sell it. By the time the bank has the house in their possession and they’re ready to sell it again, they will have invested a lot of time and money in the process.
Banks are much more motivated to sell than regular market sellers and will generally accept a lower price for the home. They can take the financial hit that comes from selling a property for less than its market value and, after going through the lengthy repossession process, their primary concern is usually getting the debt off their books rather than selling for the highest possible price.
Because banks don’t expect their internal valuations to match those of any surveys conducted on behalf of buyers or sellers, they are undertaken with a different set of priorities in mind. Market valuations consider the property market’s state and how much money a property is likely to fetch for a seller under current market conditions, and what a reasonable offer would look like from a prospective buyer would look like. On the other hand, bank valuations factor in the costs of selling the property; real estate commissions, legal fees, and additional costs all need to be factored into the equation.
Because their purposes are different, market and bank house valuation methods are also different. They are also compiled with different audiences in mind; the bank property valuation is for the bank’s benefit; they won’t share the results with buyers or sellers. While the bank valuation for a property is strictly for their internal use, surveyors compile market valuations to establish a reasonable purchase price to benefit buyers and sellers.
What are Bank Valuations Used for?
While buyers and sellers rarely see the results of a bank valuation, the resulting report can significantly impact their plans. Suppose the bank’s valuation suggests the property is worth considerably less than the value of the mortgage. In that case, they will either decline to lend the money or substantially alter the mortgage terms. Naturally, banks don’t want to lend more than the property is worth. Or, more specifically, they don’t want to lend more than they think they’ll make from the sale of the property if the borrower defaults on their repayments.
The bank expects its valuation to be less than the purchase price. The home will serve as collateral against the loan, so the bank’s primary concern is ensuring that the property’s value is sufficient to cover the loan in the event of a default. Not only do banks have to consider the time it will take to repossess a home, but the longer the property is in their possession, the more the bank will have to pay in interest. Banks regularly end up selling repossessed homes for less than their market value.
What Happens if the Bank Valuation is Low?
If the bank valuation is lower than expected, you might not be able to borrow the amount you need. This can throw a massive spanner into the works for property buyers, who will need to make up the shortfall in funding elsewhere. If the bank valuation is less than expected, and you can’t find enough additional financing, your mortgage application might end up being rejected entirely. However, there are a few avenues of redress open to you if this is the case.
- Dispute the original valuation: If you feel that the original valuer has underestimated the value of the property, you can dispute it. However, you will need evidence to back up your assertion. In most cases, this will take the form of valuations of similar properties in the area. If there’s a significant discrepancy, it can enable you to dispute the valuation. However, you should be aware that valuers rarely change their original valuation.
- Request a valuation from a different surveyor: Banks will maintain a panel of surveyors to carry out their valuations. If you feel that the first valuer surveyor they send to value your property has got it wrong, you can request they repeat the valuation using a different valuer. Another surveyor might produce a different result that is more in line with the value you expect.
- Cover the shortfall: If you fail to secure a new valuation or multiple surveyors come back with the same figures, you can always solve the problem by covering the shortfall using other financing options. Of course, if you cover the shortfall by borrowing money from elsewhere, you need to factor in the fact that you will be taking on more debt in addition to the mortgage.
How to Find Out Your Home’s Market Value
Your property’s bank valuation will be lower than the purchase price, also known as the market price. Finding out your market price won’t tell you what the bank valuation is, but it will give you a ballpark figure to work with. If the bank informs you that their valuation is much lower than the value of the mortgage you’re seeking, the market value of your home won’t prove otherwise. But by comparing the market value of your property to other properties in the local area, you can establish whether it’s valued similarly to other nearby homes.
Bank valuations are internal documents for lender’s use; their purpose is to provide them with a tool for regulating their own lending decisions, ensuring consistency within their organisations, and making sure they adhere to appropriate regulations. Bank valuations protect the banks by mitigating their risk when acting as lenders. Whereas market valuations are, as the name implies, affected by market forces, bank valuations are less susceptible to these fluctuations.
How Much Does a Bank Valuation Report Cost?
The fees lenders charge for a valuation can vary considerably according to several factors. In general, the bigger the property, the greater its value will be, and the more expensive the valuation survey will be. However, some lenders will offer a free valuation survey on some of their mortgage deals.
It’s important to note that bank valuation surveys are sometimes conducted remotely, in what’s known as a ‘desktop valuation.’ Since the covid-19 pandemic struck, these types of survey have become more commonplace. Many lenders recommend that buyers also commission their own surveys to determine the value of the properties they are thinking of purchasing. A property survey will also provide you with details about the property’s condition and highlight any areas that require repairs.
Lenders will also have their own criteria for mortgages; they don’t just consider the value of the property. For example, some types of mortgage won’t be available for homes constructed from non-standard materials, such as prefabricated concrete or wood. Mortgage listings will include any requirements the lender has in place, but it’s always worth double-checking.
Bank valuation reports are essential tools for lenders and form an important component of their risk mitigation. By establishing the property’s value, lenders can ensure that the property is valuable enough to act as collateral against the money they loan you for a mortgage. Before you get too far into the buying process, you should familiarise yourself with the different types of property survey available and work out which ones you will rely on throughout the homebuying process. The bank valuation report is for the benefit of the bank providing your mortgage, but there are several other types of property survey that enable buyers and sellers to ensure everything is above board and the property in question is in good condition.