What Is a Mortgage Valuation and What Happens After?

A mortgage valuation is a formal assessment of a property’s market value, integrated into the mortgage application process. It establishes a property’s worth from a lender’s perspective, determining the amount a financial institution is willing to lend against it. Understanding its function helps prospective homeowners navigate securing financing for their purchase.

Understanding Mortgage Valuations

A mortgage valuation primarily serves the mortgage lender’s interests, not the homebuyer’s. Its main purpose is to confirm the property’s value as collateral for the loan, mitigating the lender’s financial risk. This assessment ensures the amount borrowed does not exceed the property’s actual market worth. It also helps calculate the loan-to-value (LTV) ratio, which influences the mortgage rates available to the borrower.

Qualified surveyors or valuers, appointed by the lender, conduct these valuations. For standard properties, an Automated Valuation Model (AVM) may be used, which estimates value based on recent sales data. While the buyer often pays for this service, the report is generated for the lender, and the buyer may not always receive a copy.

What the Valuation Assesses

When conducting a mortgage valuation, the valuer considers several factors to determine the property’s market value. These include the property’s type, age, current condition, and overall size. The valuer also assesses the property’s specific location, looking at neighborhood desirability, proximity to amenities, and local market demand.

A brief inspection of the property is conducted, focusing on its structural integrity and any visible defects that could impact its value. This might involve a physical visit or a “drive-by valuation” where the assessment is made from the exterior. The valuer also reviews recent comparable sales data for similar properties in the area to inform their professional opinion of the property’s worth.

Valuation Versus Other Property Assessments

A mortgage valuation differs from other property assessments, such as a full home appraisal and a home inspection. A mortgage valuation focuses on confirming the property’s value for the lender’s lending purposes, often resulting in a concise report. In contrast, a full home appraisal, an independent opinion of value, provides a more detailed analysis and is often sought by the buyer.

Unlike a mortgage valuation, a home inspection is not concerned with the property’s market value. Instead, a home inspection thoroughly examines the property’s condition, identifying minor defects, maintenance issues, and potential repairs. A mortgage valuation will flag major structural issues affecting value, but it is not a substitute for a comprehensive home inspection, which provides a detailed assessment of the property’s functionality and safety.

What Happens After a Valuation

After the mortgage valuation is complete, the valuer submits their report to the lender. If the valuation matches or exceeds the agreed-upon purchase price, the mortgage application proceeds as planned, allowing the lender to finalize the loan offer.

However, if the valuation comes in lower than the purchase price, known as a “down-valuation,” the lender will only approve a loan amount based on the lower, assessed value. For example, if a property is agreed at $250,000 but valued at $240,000, and the buyer needs a 90% mortgage, the lender would only provide 90% of $240,000, leaving a shortfall. The buyer can attempt to renegotiate a lower purchase price with the seller or increase their down payment to cover the difference. Exploring other lenders for a different valuation or a mortgage product with a higher loan-to-value ratio are also possibilities.