What To Do When The Mortgage Valuation Comes Back Lower Than The Purchase Price

Mortgage Valuations That Come Back Lower Than The Purchase Price
14 May 2015

Mortgage Down Valuations

A mortgage down valuation can be a frustrating element of any mortgage purchase or remortgage. Ultimately, the value of a property is the amount someone is prepared to pay for it. However, lenders need to set their own independent value on an asset they plan to lend against and, even if you have successfully negotiated a property purchase or sale with someone, in most cases you still have to wait for the mortgage company to value the property. Often the report agrees with the sale price and the mortgage application moves forward – but what if the valuation price comes back lower than the purchase price? This is otherwise known as a “mortgage down valuation”, but before we explore the maths behind this frustrating but all too common phenomenon, it’s worth understanding more about how the mortgage valuation process works, what the options are and why they are carried out in the way that they are.

The precise term for this process is a mortgage valuation yet, clients and brokers alike (I too am guilty of this!) often refer to these as surveys. However, a survey is something that is carried out for the benefit of the client and so will consider the property as a whole and the factors that would be important to them, such as the strength of the structure, the utilities available or weatherproofing just to name a few. The mortgage valuation is far simpler than a typical client survey, most often known as a “homebuyers report”. It’s typically no more than two pages in length and has a number of tick boxes to confirm the property’s integrity, utilities, size and construction methods. Of course, the surveyor will also include their estimated valuation. This is usually determined by finding other similar property sales, ideally within quarter-mile radius and within the last three months but, at the very most, these can be over a half-mile radius or over six months depending on the turnover of properties in the area or the density of property.

This stage can often be the root of a few problems. For instance, you might have the most beautifully decorated and styled home, but if several run-down but comparatively sized properties have sold recently for a lower value, they are going to result in a mortgage down valuation. Conversely, a very well thought out and styled home may sell very quickly and be in great demand, which could lead to a higher than average selling price, but there is no guarantee that the market value will be the same. There are a great number of resources that can help clients understand more about the values of properties. We wrote about a few here.

To further aggravate the situation, a separate company to the lender generally employs the property surveyor and, as a result, the lender has no choice but to take the surveyor’s word for it. For example, if you disagree with the resulting mortgage down valuation there is little that can be done. There are appeals processes, however after six years in the industry and witnessing countless appeals, I’ve never seen one overturned. The reason for this is quite simple. When a surveyor visits a property they get paid, they write the report and move on. If they have to deal with an appeal they are not getting any extra money for that work, which may involve a repeat visit to the property. Every appeal that is successful will not only underline the fact that they were wrong in the first place, but also incentivise a broker or client to appeal other results from the same surveyor. Lenders also want surveyors who get these things right. A change in the valuation as a result of an appeal means that these surveyors have to do more work for the same money, have to encourage more appeals and are given less work in the future. As you can imagine, that is not going to keep them (the surveyor) in business for very long.

So a “down valuation” may not take into account some of the features that made the property appealing to you or to the people buying it, and if there is little chance of recourse, what does it mean for the mortgage application? It all depends on the mortgage Loan to Value (or LTV) that is being applied to the mortgage application. Essentially, the LTV is a percentage of the amount of loan being borrowed compared to the value of the property (calculated by looking at which is lowest between the purchase price and the mortgage valuation result).For instance, a property being bought at £120,000 with a mortgage of £60,000 is at an LTV of 50% – the mortgage is 50% of the value. If the mortgage valuation comes back at £80,000, this figure is recalculated by the lender and the LTV then becomes 75%. The Loan to Value is one of the key risk factors that lenders take into consideration and will affect many things on your application.

For example, if a buyer does not repay the loan, the court can repossess and the property can be sold to pay off the loan. Repossessions are expensive. If for instance the average amount recovered by the bank was 85% of their loan, then customers borrowing over 85% of the property value are more likely to leave them out of pocket than those borrowing below this threshold. This is why pricing is tiered based on the Loan to Value. As a result, you can expect your rates to increase when the lender recalculates your LTV from 50% to 75%. As a further complication, the lender may have based the amount you can borrow on this LTV. An increase in your LTV percentage may cause the loan amount available to you to decrease. The credit scoring system may also have used this as a factor in the decision. It’s quite possible that increasing the LTV from 50% to 75% would turn an application that was agreed into one that would now be declined

The examples used above are extreme to illustrate the difference clearly. The reality may well be less severe, but what happens when you are borrowing at the highest LTV the lender offers, such as at 90%? If this were the case, then you may simply have to accept that you will only be able to borrow 90% of what the lender thinks the house is worth. In this instance, the first thing you may want to do is re-negotiate with the vendor. After all, any other buyer would be facing the same problem sooner or later. Any decrease in the agreed purchase price will reduce the burden on the buyer but, if they won’t reduce it in line with the mortgage valuation, the buyer will have to increase the deposit to match the difference between 90% of the mortgage valuation and the agreed purchase price. In the example above, 90% of £80,000 would be £72,000. An initial deposit of £12,000 would then become a huge 48,000! This is another extreme example, but the effects are clear.

Finally, buyers be wary when paying over the asking price. Just because something is desirable to you, does not mean it will be considered desirable to the mortgage lender. If you are selling a home this is also important to consider as it’s likely that your buyer will be using a mortgage. Understand the market value and consider how much deposit the buyer has; if they are stretched thin and paying over the odds it there might be trouble ahead.

Here at AALTO Mortgage and Property Solutions we are very experienced in dealing with lenders and surveyors who have right tools to estimate prices. If you have any doubts speak to us first before making an offer and we can give you some advice. Remember we are completely broker fee free as we simply take the commission from the lender.

 

Your home may be repossessed if you do not keep up repayments on your mortgage.

 

8 Responses

    1. Stuart Phillips

      Glad you found it helpful. Subscribe in the box at the bottom of the post if you would like to be notified of new updates.

  1. K

    I am currently in the process of purchasing a new build from persimmon – the survey was carried out last week and they have devalued the property by 25k.

    The purchase price was 239,995 and the surveyor has valued it at 215,000.

    The report indicated that there was outstanding work to be done which of course there would be the property is still under construction! Persimmon have now advised us that we will need to pay for another survey! That’s another £500 that we will have to pay and risk losing as we do not have the 25k shortfall proceed if persimmon won’t re negotiate the property price.

    I have googled everywhere and I can’t seem to find this scenario for any kind of advice or guidence on how best to proceed with this?

    1. Hi did u ever get this house the exact same think is happening to me with persimmon too and by 25k the first time the sales man sent him to wrong plot and and he valued the wrong house per summon paid for another survey and it can back today as down valuation 25k

  2. Stuart Phillips

    Hi K

    Typically with a new build the surveyor assesses a new build based on the completed property, perhaps using a showhome if needs be. Sometimes they will visit the site, give a preliminary valuation and then revisit once complete before the offer is produced.
    However there is never a guarantee that the mortgage valuer will agree on the purchase price, and if persimmon won’t renegotiate you dont have much recourse.
    If i were in your shoes i would request confirmation from the surveyor that the property will value up at the purchase price once all the required works have been carried out. I suspect the works required do not have anything to do with the value they have placed on the property.
    The only other option from there is to try a different lender, but even then, theres no guarantee you get a different surveyor, or if you do, no guarantee that a different surveyor would give you a different valuation.

  3. We have been to view a property which is £210k houses in the area have sold for £130k-£161k and I brought this up with the EA.
    I would be willing to put an offer in of £150k as the house ticks many boxes for me ans my husband. Is this an offensive offer?
    Our mortgage AIP is for £144k and we would look to put £20k down.
    Can you advise me on when to put an offer in, what to consider and how to get the house!
    We lost out to a cash buyer on the 1st house we went to see, so I would be disappointed again if we lost this!

  4. Stuart Phillips

    Hi AJ

    Every vendor is different!

    Some might have another property they are looking at,and they are willing to take a hit on their own if that secures them a buyer, others are in no rush and happy to sit and wait for years to get the right offer.

    The key here is to press the EA to understand the vendors position, and use what you discover to affect your offer.

    Offensive maybe, but an offer is just an offer, the worst they can do is say no.

  5. Hayley Lester-Smith

    Hi Stuart
    We are buying a property with a purchase price of 186,500k. The mortgage valuation has come back at 160,000. Thr house next door of similar condition has just completed a sale today of 188,000k.
    We initially was putting in a 40,000k deposit however this has massively now affected our LTV and potentially do not want to have lost 26,500k.
    I am finding the valuation process bizarre due to the successful sale of the house next door. Especially as we intend to put a healthy deposit in surely lenders would take this into consideration? Any help much appreciated

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