If you want to know what you can do when you get a mortgage valuation that is lower than the agreed property purchase price, then this article will help.
For those who may not be aware, a ‘down valuation’ may occur when the lender requires a formal valuation of the home you want to buy and finds it is worth less than you are expecting.
There are two issues to consider when this happens which – according to the Royal Institution of Chartered Surveyors (RICS) who are often instructed by lenders to help them establish the market value of the property – may include:
- The lender must establish that the purchase price that has been agreed on a property is reasonable;
- And for those who are remortgaging, the lender needs to establish that the market value currently of the home is what the borrower says it is.
Essentially, when a mortgage lender finds that the property’s value is less than the borrower is expecting, then this will be referred to as ‘down valuation’.
Realistic market value
It’s also important to appreciate that the independent surveyor is not being difficult when they value a property at less than what you believe it is worth because they are under a professional obligation to offer a realistic market value and they will use criteria, including:
- Checking other properties locally for their selling prices;
- Use their knowledge of supply and demand in the area and market conditions;
- Check the property’s condition to see whether it affects its value.
We can illustrate this issue and the potential problem that arises quite easily.
You may have offered £250,000 on a property and this has been agreed by the home seller. The next issue is that the independent valuation undertaken by the surveyor calculates the property is only worth £230,000.
This means that the surveyor has down valued the property by £20,000.
This then leaves the buyer with one of three choices:
- Pull out of the sale;
- Find a new mortgage lender and hope their valuation meets the sale price;
- Stump up the difference between the ‘down value’ and the selling price.
In this example, the down value means they will have to find £20,000 for the sale to be completed – and for many potential homebuyers, that’s a big ask.
What can you do if your house is undervalued?
In addition to those three choices, there are other potential avenues to explore if you want to know what you can do if your house is undervalued by the lender.
Again, there are three choices to consider:
- You could renegotiate with the seller and ask them to lower their selling price. This will be a difficult conversation but having a lower value valuation may lead to a better deal on the property. This is a potential route if the seller is struggling to sell and there hasn’t been much interest. Also, if the seller has already found somewhere else to buy and doesn’t want to delay moving, then they may be willing to renegotiate.
- You can also challenge the valuation of the surveyor but not every lender is open to appeals. They are also unlikely to be successful but some may be willing to let you appeal their valuation. This is where you’ll need to do your homework and seek out evidence of what similar homes sold for in the area. You can also ask the lender about the details of the valuation and ask, for example, whether the surveyor checked inside the property because they may not be aware of major renovation repair work to boost its value.
- Reapply for a new mortgage with a different lender. If you can appeal the decision and you don’t want to stump up the difference, then you can apply with a different lender for a new mortgage. Again, they will require an independent valuation that you’ll need to pay for. You also have the opportunity that the surveyor may well value the home at a slightly higher price.
It’s important that you never lose sight that the final say on a property’s valuation will always lie with the mortgage lender’s surveyor because they have more information to hand and they have a professional obligation to deliver an informed and accurate valuation.
Before moving on, it’s also worth highlighting that should an independent surveyor down value the property you want to buy, then this is also in your interest because you will not be paying more than is necessary for a home that is not worth what you think it is.
Mortgage valuation too low
There’s also another interesting scenario to appreciate when you have a mortgage valuation too low for the bid you have made on a property.
That’s because the mortgage valuation will affect your finances because the amount you are looking to borrow will be based on a percentage of the home’s value.
So, should the property be valued at less than the seller’s price by the surveyor, then the lender will be looking to reduce how much they are willing to loan.
With the down valuation, it’s this finance that can be hard to agree since you may not be able to access enough money to buy the property, even if you want to pay the difference.
To explain this more clearly, consider that you’ve agreed to buy a house for £250,000 and you have a 20% deposit ready that is worth £50,000.
This means you are then applying for a mortgage worth £200,000, that’s an 80% loan to value (LTV) mortgage with a set rate of interest.
However, the problems begin when the surveyor values the property at £230,000, which means the mortgage lender will only advance 80% of the lower amount which leads to a shortfall of £16,000.
Depending on circumstances, you may opt to borrow the £200,000 which then means your loan to value mortgage is higher and will attract a higher rate of interest, so the loan itself becomes dearer.
Mortgage valuation lower than offer
There are a number of issues to consider when a mortgage valuation is lower than the offer you have made on the property.
And according to one online estate agency, around one in five properties will be down valued.
From their research, they say that the frequency of properties being down valued has been steadily rising over recent years which means some buyers will have lost out on buying their dream home.
And to put this into perspective, in 2016 just one in 20 properties were being down valued.
The housing market has always had down valuations so they are not a new scenario and tend to happen when house prices are running out of sync with the market’s current trends.
The likelihood of a down valuation occurring is in those areas where house prices are either falling or where there are not many sales being made.
It’s here that the seller has probably not adjusted their selling price to match the market conditions so when property sales cool, the values will fall slightly as well.
A spokesman for Which? Mortgage Advisers said: “It’s important that buyers research the properties that have sold over the past three to six months in their area.
“For sellers, similarly, it’s important to be realistic about how much their home is worth. The reality is that sometimes their home may be worth less than when they originally bought it or remortgaged.”
He added that some home sellers may even find that after home improvements have been carried out, the property may be worth less than they had hoped.
Is a mortgage based on the purchase price or value?
For anyone asking, ‘Is a mortgage based on the purchase price or value?’ Then it would be a great situation for all of us if mortgages were handed out for the home seller’s price.
Unfortunately, mortgage lenders have to be realistic and in a worst-case scenario, they will have to sell your home to recoup the balance of their mortgage debt so they are not particularly interested in how much home seller says their home is worth.
Instead, they are interested in how much they can sell it for, if needs be, which means they need an accurate and independent valuation of that property.
You may even find that it’s worth while investing is a full property report from a RICS surveyor so you are not only made aware of any issues with the property you want to buy but the surveyor will also offer an idea of its market valuation.
This information can also be used to negotiate a lower price and, let’s face it, the valuation figure being quoted may also prepare you for disappointment when it comes to sourcing a mortgage to buy the property.
How common are down valuations?
According to industry experts, the answer to the question of ‘How common are down valuations?’ is that they are an increasing issue, particularly when house prices begin to soften or fall.
However, there’s also another issue that needs to be considered should you decide to find another mortgage lender, which means you should think twice about turning down the original mortgage being offered to find a better deal elsewhere.
There’s no doubt that the mortgage application process can be stressful and the mortgage valuation stage is one of the most important.
That’s particularly true if the house you want to buy is undervalued by the mortgage lender and it then derails the entire sale.
We explained earlier that you can renegotiate the selling price, pay the difference between the down value and the mortgage or you could also apply with a new mortgage lender.
Again, they will need to appoint independent surveyors to value the property and you are taking the chance that they will see the property in a fresh light with a valuation close to the seller’s asking price.
However, the big problem may come with the fact that over a short period of time, lots of credit checks have been carried out by potential lenders which may then affect your likelihood of receiving a mortgage at all.
You may find it easier to use a mortgage broker, particularly one that covers the entire market so that the credit enquiries are kept to a minimum and you will increase the chance of finding a mortgage lender with a valuation that is more in keeping with what you are hoping for.
Subjected to a down valuation
If you have been subjected to a down valuation, then RICS says you need to be sympathetic to the mortgage lender’s situation.
A spokesman told us: “For those buying a home with a mortgage are borrowing money and a lender’s valuation will be required to establish the price being paid for the property is one that represents the home’s market value.”
He added that when a buyer overpays more than the estimated market value of the property, it is the lender that is being placed at extra risk – with the buyer paying too much for their home.
The spokesman said: “The valuation determines the property’s value for the bank and it’s worth noting this may be different to what a cash buyer will pay for a property, for example.
“If the valuation is less then the seller’s or estate agent’s estimate, this may be called a down valuation. You could go ahead with the sale still, if you have the funds, but the mortgage lender will not take the risk for you.”
Essentially, if you’re in a situation where the mortgage valuation is lower than the purchase price, then unless an appeal is successful you may have to rethink whether you can afford to buy the property you are hoping for or finding the extra funds to pay the difference to buy what may be your dream home.