Are you in the market for a house? It must be a life-changing moment for you, so congratulations are in order! As you’re getting closer to becoming a proud homeowner, you might stumble upon a discouraging realisation – buying a property is both expensive and complicated.
As a prospective homeowner, you should arm yourself with up-to-date real estate knowledge. You will find a reliable budget calculator and a good sold house prices checker tool very useful.
As you’ve probably heard, you will also need a house valuation from your bank.
This article will help you learn everything you need to know about property valuations, how they are carried out, who is tasked with this, and why banks require them.
However, before we take a deeper look at bank appraisals, let’s get one common confusion out of our way – bank valuations are not the same as market valuations. If you have already spotted a house of your dreams and made an offer, a bank appraisal might ruin your plans and break your budget.
Read this through before you put a price on your future home.
What is a house valuation from a bank?
What do we mean by valuation in real estate?
A property valuation is when a chartered surveyor or an independent valuer comes to your home to provide an informed and knowledgeable assessment of its worth. Whether you’re a homeowner or are looking to buy, you need a professional appraisal to tell you the true value of your property.
Home valuations are used in a range of different scenarios. Aside from helping you determine the right price when you’re selling or buying, appraisals are also necessary for tax reasons, mortgages, and loans. You need one in every situation where you are using your house as a legal or financial asset.
A bank valuation is the property appraisal conducted by and for your bank.
For this, most banks use independent valuers. These professionals provide an expert estimate of how much your house is worth based on several factors, such as the current condition of your property and the state of the market, as well as the location, curb appeal, and your neighbourhood.
The bank needs this estimate to determine whether or not it should lend you money. House valuations allow lenders to calculate the overall risk and profit margin for giving mortgage approvals.
Is bank valuation the same as market valuation?
If your bank wants to know the actual value of your house for any of these reasons, there is something you need to understand: bank valuation is never the same as market valuation.
A market valuation is your house’s worth at the moment of buying or selling.
A market valuation is affected by the same factors that a bank’s property valuers take into account when they come to evaluate your house. That includes both internal and external characteristics of your property, as well as the current trends and demand in your local real estate market.
The main difference between these two types of appraisals is who benefits from them.
The only party to benefit from a bank valuation is the bank, which is why some banks won’t even share the appraisal report with you. This valuation serves only one purpose – to protect the bank in the event that you must forfeit your loan and repay the rest of the loan with your property.
For this reason, bank valuators are focused more on potential losses for the bank than eventual gains for you as the property seller or buyer. For example, if the local market is booming at the moment, the bank evaluator won’t consider that as an important factor for their property estimate.
You could say that banks always look at the worst in our properties.
When do you need a house valuation from a bank?
You need a house valuation from a bank in the following scenarios:
- You want to buy a new property;
- You need a mortgage refinance;
- You want to access your equity.
A mortgage is a loan that you take against your house, which acts as collateral in case you can’t pay off your loan. In any scenario, the bank needs to know the property’s objective value to avoid lending you more than you can repay.
If it comes to this, mortgaging rules allow the bank to take your property, sell it, and keep the money. However, the bank won’t try to increase its value first and wait for the highest bidder, which is what most people do when selling a house in an open market. It will sell it quickly for a lower price.
So, banks are most interested in something called the loan-to-value ratio (LVR).
LVR is calculated like this: loan ÷ value = LVR
- For example, the bank appraisal says the property is worth £700,000.
- The total amount of deposit and other fees you must pay is £100,000.
- The amount you need to borrow from the bank is, therefore, £600,000.
You LVR would be £600,000 ÷ £700,000 = 80%
The lower your LVR, the better, as it means that you will have more equity in your home from the start. If your LVR is high, you will be borrowing more of your property value. When your LVR is above 80%, you typically have to pay for insurance to protect the bank if you default.
At what stage is a mortgage valuation done?
Following your mortgage application, you can expect your bank’s valuer to visit the property after you receive an Agreement in Principle (AIP), a document that outlines how much your bank is prepared to lend you if all further checks show you as a profitable applicant.
Banks offer AIPs as a rough estimate of a mortgage loan, based on the information you’ve provided in the application and your background and credit check. A mortgage is rarely higher than this estimate – if the AIP is too low for you, the bank won’t proceed with the follow-up checks.
If you agree to your AIP, the bank will then book a property valuation.
You should know that getting an AIP is no guarantee of being accepted for a mortgage.
Do banks always do a valuation?
By law, all European banks must carry out property valuations before granting mortgages. This directive was given by the European Banking Authority in July 2021 and took effect in January 2022. Of course, UK banks are under no obligation to implement this directive.
House appraisals are currently not mandatory in the UK, but banks conduct them nevertheless. After all, the main benefit of these property valuations is for the banks themselves. Without an official appraisal, banks would lack a crucial ingredient for calculating mortgages and loans.
Are bank valuations accurate?
We mentioned earlier that banks see the worst in our properties. From their standpoint, it is for a fairly understandable reason. If you default on paying your loan and the bank must sell your house, its value must compensate for the bank’s losses, so bank appraisals are usually low.
Banks don’t want to spend their time and resources selling the property for a higher price. Investing in quick fixes or remodelling, booking a real estate agent, and spending money and advertising are not worth their time – banks want to get their money as quickly as possible.
Are bank valuations accurate? That is a complicated question.
By rule, bank appraisals are lower than estate agent estimates because estate agents are interested in the market value of your property. We have already discussed the difference between bank valuations and market valuations and explained that they vary due to their different purposes.
Which is more accurate – bank valuation or market valuation? It’s hard to tell.
When estimating your house’s worth, bank valuers and estate agents look for different things. The estate agent will want to boost your property’s selling price as much as possible, while the valuer sent by the bank wants to help your mortgage lender avoid any potential losses.
No, bank valuations are not 100% accurate, but neither are market valuations.
How does the bank value my property?
Ultimately, how does the bank value your property?
We know the valuer assigned by the bank won’t be as friendly and fond to help you get the most of your house’s worth. We know that is because their job is to protect the bank from potential risk. However, we still haven’t discussed the factors that a bank valuer will consider.
Some of the key factors for property appraisals include:
- Interior, layout, and aesthetics;
- Total number of your bedrooms;
- Amenities and special features;
- Exterior and so-called curb appeal;
- Overall property and land size;
- Structural quality and condition;
- Your location and neighbourhood;
- Current demand in the local market.
While estate agents generally look at the upside of these characteristics, bank valuers tend to downgrade them a bit. If a fixture needs to be repaired, for instance, the estate agent will tell you to fix it and won’t take it into account. You won’t be as lucky with the bank valuer.
It is also important to note that estate agents and bank valuers factor in the general state of the market differently. If your neighbourhood is up-and-coming, the current selling price can go above market value. Trends and future potential don’t play any part in house appraisals from banks.
Because of all this, bank valuations are often seen as conservative and unapologetic.
How long does it take for a bank to do a mortgage valuation?
The time needed for a bank to carry out a mortgage valuation depends on several factors. Your bank might be busy, and all of the valuers on its retainer might be too. Valuation time also depends on how quickly the valuer can access the property if the bank orders a full valuation.
It takes several days to tick all the boxes and assess all the elements we have listed above.
The more thorough valuation, the longer you will wait.
Some banks require only so-called desktop valuations, where all of the above is estimated through a book or online comparison with similar properties in the same or twin location. In rare cases, a bank valuer might use an online algorithm that generates automatic property valuations.
Depending on all this, a mortgage valuation can last from one to seven days.
How long is a bank house valuation valid for?
In most cases, a bank house valuation is valid for six months.
Mortgage valuations expire because the objective worth of your house changes over time due to market fluctuations and property deterioration. In very rare cases, a mortgage valuation might expire before the mortgage offer. This happens when the case requires complex underwriting.
If you find yourself in this situation, you’ll probably have to pay for a second house valuation from your bank. (Initial valuation is usually for free.) When a mortgage valuation expires a few days before an offer, banks typically grant an extension to avoid further delays on your mortgage.
How long does it take to get a mortgage offer after valuation?
You can expect your mortgage offer within a week after the house valuation.
Take into account that a valuer will first have to write an appraisal report and send it to the bank. Your bank will then reconsider your mortgage application in the light of this new information, do the math, and pen down a formal mortgage offer that is usually sent to you by mail.
What happens if a bank’s valuation is low?
There are two words that mortgage applicants fear the most: valuation shortfall. In plain words, a house valuation shortfall is when your bank valuer estimates that a property’s worth is much lower than you had expected. If you receive a valuation shortfall, give your best not to panic.
Hopefully, you started reading this before putting down an offer for the property you like. With bank valuers being unapologetic and most bank valuations being on the low side, it’s always better to wait until you get an official mortgage offer. Otherwise, you might be short on money.
Is there anything you can do about a low appraisal from the bank?
It is a relief knowing that you have a couple of options:
Dispute your bank’s initial valuation
Sometimes, valuation shortfalls happen not because the bank’s valuer was callous but because they have used outdated market data. You can try talking to your representative and ask for clarification, especially if the bank didn’t disclose the complete appraisal report.
If the bank is willing to cooperate on this, you might be able to improve your position by collecting fresh real estate data yourself. For example, you can provide evidence of sales of similar properties in the neighbourhood, which you might be able to obtain from your (potential) neighbours.
Is this property in a booming market? If so, you might be able to find some evidence of this. Put in writing why you believe that the original estimate was incomplete or inaccurate and submit this to your representative. We must warn you upfront, though – disputes are rarely successful.
Request a second valuation from the bank
To ensure clients that their property valuations are as accurate as possible, reputable banks usually partner up with a couple of chartered surveyors. Because their knowledge and experience in your local market may vary, you might have better luck with a different property valuer.
Find alternative ways to cover the shortfall
If the second valuation has only confirmed the shortfall from the first appraisal, but you’ve already put down the offer for a new house, the only option you have left is to find other ways to pay for the house. You can try applying for a personal loan or borrowing money from a friend.
Consider consulting a mortgage broker
A mortgage broker can be defined as an intermediary between you and the bank. To avoid confusion, a broker does not lend you money. That is a professional advisor who can help you get the most out of your current financial situation and recommend the best deals and options for your case.
If you decide to accept the mortgage offer despite the valuation downfall, you’ll probably need to pay mortgage insurance to your bank in addition to regular mortgage payments. This insurance will cover the potential risk that the bank is undertaking by approving your application.
Can my mortgage be declined after bank valuation?
Remember LVR? In most banks, the tipping point for your loan-to-value ratio is 80%. Everything above that is considered a massive risk for both you and the bank. If your LVR is higher than 95%, your mortgage application will likely be denied following the house appraisal from the bank.
Though this is unlikely to change the bank’s mind, you should try disputing this decision.
Conclusion
House valuation from the bank can make or break your plans for the future. It’s bad news that most valuers who carry out appraisals don’t have a soft spot for your dreams. Many aspiring homeowners give up on their plans somewhere between high LVRs and valuation shortfalls.
However, there is good news, too.
The better you understand the property valuation process and mortgaging requirements, the better your chances. Now that you know that bank valuers look for flaws, you can start fixing them. You can do a lot to boost your property’s worth in time for the valuation appointment.
Unfortunately, there’s not much you can do if the bank appraisal says that the property you want to buy on a mortgage is not worth the loan you expected. On the bright side, you can look for other dream houses with this new knowledge in mind. There’s one waiting just for you.