Lender valuations v market valuations

One of the confusing aspects of buying a home is the way it can be valued. The same property often comes with two valuations – one assessed by the market and the other by your lender.

Why is it so difficult to get a single, accurate representation of your property’s worth? It’s important for homebuyers to know the difference between the two property valuations.

Say you’ve done all your research and found the home you want to buy. You’ve spoken to a real estate agent, who has given you a market valuation for the property.

You then start your home loan application. The lender tells you that it’s going to send somebody out to get an independent valuation. That’s no problem. After all, your real estate agent has already told you what the property is worth.

However, your lender comes back with a completely different figure to the one you had in mind. This bank valuation might be much lower than the one your property agent gave you.

You’ve just discovered that there are two valuations for your property – the market value and the lender value. Depending on what impact this has on your loan-to-value ratio, this might determine how much you need for a deposit and how much you’re able to borrow.

Why is my lender’s valuation different?

You have to remember that your lender creates a partnership with you when it offers you a home loan. Your lender gives you the money to buy the property on the condition that you will make your regular repayments.

As a result, it will take a more conservative approach to valuing your property than a real estate agent might. Your lender’s valuation is quite likely to be much lower than the actual market value of the property.

This is because your lender needs to protect itself if you default on your loan. Your lender’s valuation reflects what the lender feels the property would sell for if it enters foreclosure.

Simply put, a lender needs to cover the shortfall created when it decided to lend you the money for the property. If all goes well with your home loan, your repayments will cover this debt. But if you default, your lender will need to sell the property as quickly as possible to recoup its losses.

There are other factors to consider. For example, your lender needs to take into any account legal fees and commissions it might have paid to get your business. Both of these could lower its valuation when compared to the market valuation.

A change in internal policy could also affect how a lender values its properties, especially if that lender wants to devote less finance to the property market.

Why should I get a market valuation?

As long as it’s done by a reputable firm, a market valuation is still important. It gives you a base-line figure of how much you will need for a deposit. It also helps you work out the properties that fall within your target price range.

There’s usually no reason not to get a market valuation – most real estate agents offer it for free.

However, one thing to keep in mind is that it’s in the real estate agent’s best interests for your property to be valued as high as possible. This is because agents earn their money by selling homes – the greater the sale price, the better it is for them. So, it’s important to remember that they might be inclined to give you a slightly inflated figure to keep you around as a customer or to help drive up the property price.