MIJ GIBSON NOV 23, 2021
When you apply for a loan to purchase a property, the bank will conduct its valuation of the property and use its findings to decide whether to lend you the money you want.
This valuation report is different from an appraisal. It gives the bank more than just an amount.
With an appraisal, the selling agent assesses what the property could sell for on the open market. It’s only an indication based on:
- recent comparable sales in the area
- condition of the property
- number of buyers making active inquiries for similar properties
- the agent’s expertise.
A valuation on the other hand is done by a qualified valuer who incorporates a list of variables that can result in a different amount to the appraisal. It is often lower than the appraisal.
A Valuer’s function is to determine the property’s “Fair Market Value”, which is based on:
- land value
- improvements done to the property
- town planning considerations
- analysis of the property’s layout
- professional observations about your property’s suitability as security for the loan because the bank will need to know what it “would” sell for if you can no longer make your repayments.
A bank also uses risk ratings in its valuation process as part of its decision-making process. So even if you receive a good valuation amount, you may still not get the loan, especially if the bank considers your risk rating too high.
Risk ratings are ranked from 1 (low) through to 5 (high risk). And if your lender prefers lower returns, with known risks, rather than higher returns with unknown risks, then a rating of 4 or 5 will mean your loan is unlikely to be approved.