A home buyer can view their house and land in a different manner to a bank, lender or valuer. Where the home buyer sees future, family, opportunity and home, the banks see risk.
Before your lender gives you a loan, they will use a valuer. A valuer assesses your land and home, and if they believe you are paying more than what they think the house or land is worth, a valuation shortfall occurs.
HOW IS PROPERTY OR LAND VALUED?
A valuer will determine the worth of your house based on the price other similar properties in your area were sold for. Ideally they would compare apples with apples, and then came up with an estimated value for your property.
Other things a valuer will consider include the area’s growth prospects, ease of selling in the area and the surrounding facilities. What they may not take into account is any upgrades or additions you have made to your home, which may seem important enough for you to spend money on, but count for little to a bank’s resell prospective.
Valuers are generally conservative and will consider the worst-case scenario. This is because if you cannot make your mortgage repayments the bank will need to repossess and resell your home and they do not want to be out of pocket.
WHAT DOES THIS MEAN FOR YOUR LOAN?
A bank will only loan you a certain percentage of the total value of your home. This is known as Loan to Value Ratio (LVR). If you have a valuation shortfall, the bank will only lend you a certain percentage of what the valuer says is the value of your home, rather than what you are paying. For example:
The bank is providing you with a loan at 90% LVR.
You are about to pay $200,000 for a home (excluding land) with a 10% deposit of $20,000. You need a loan of $180,000 to cover the rest.
The lender then values the home at only $190,000, leaving you with a $10,000 shortfall.
The bank will only loan you 90% of $190,000 which is $171,000. You need to come up with an additional $9,000 to purchase your property.
WHAT CAN YOU DO IF YOU EXPERIENCE A VALUATION SHORTFALL?
Valuation shortfalls are common in off-the-plan designs as it is difficult to assess the value of a property that has not yet been built. If you experience a shortfall there are a few options you can consider:
- Get a second opinion from another valuer. If you have a good mortgage broker you may get a better result and you may have the option to choose a different lender.
- Provide evidence to the valuer that your home is worth more. Fixtures and landscaping are often not included in a valuation.
- If you can afford it, pay the shortfall difference towards your loan. Short term it can be painful, but ultimately it will reduce the amount of interest you pay over the lifetime of the loan.
- If possible, a gift from your family can cover the shortfall.
- Look for lenders with a higher loan to value ratio (LVR). Some lenders will only lend up to 80% of a homes value, while others go up to 95% LVR. If your loan was at an 80% LVR increasing it may provide you with enough funds.
For more information on how to deal with a valuation shortfall, speak to your bank, lender or your builder.