Getting a home loan preapproval doesn’t mean your mortgage is automatically guaranteed. Many lenders preapprove home loan applications on the condition that the value of the property being bought is enough to secure the loan. If the lender’s valuation comes back short of the price you’ve offered to pay, you could be left in a difficult financial position, though there are steps you can take to try and recover.
Why do home loans need valuations?
Home loans are typically secured by the value of the home being purchased. If you default on your repayments, your lender will be able to repossess and sell your property to help recover the money they lent you.
When you make an offer to buy a property, the lender will conduct a valuation to confirm the property’s value. If there’s a big difference between your offer and the valuation, giving you a home loan may put your mortgage lender at more risk than they’re willing to accept. This could lead to your mortgage application being declined.
The level of financial risk a lender is willing to accept can be found in the maximum Loan to Value Ratio (LVR) for a home loan offer. For example, if a home loan is advertised with an LVR of 80 per cent, you’d be able to borrow up to a maximum of 80 per cent of the property’s value, and would have to pay the rest upfront as a deposit.
Why do valuations come up short?
- Prices in your area have fallen dramatically: In the past, major economic events such as the Global Financial Crisis have led property values in some areas to quickly fall in value. If something similar were to occur in between making an offer on a property and the valuation, your valuation could potentially fall short.
- The property has big problems: If you missed a significant structural issue (e.g. foundation cracks, termite infestation, rising damp) when inspecting the property and/or ordering a building report, the property may hold less value than you expect.
- Not enough information: If there haven’t been any recent sales of comparable properties in your area, the valuer may not have enough data to accurately assess the property’s value. This may also be the case if you’re buying property off the plan or buying land to build on in the future, as the final value of the property may not yet be known.
- Your offer is too high: Maybe you got carried away at the auction. Maybe you wanted to make an offer high enough to scare off competing buyers. But if you offer too high a sale price for a property, you may go too far beyond what the house is worth according to the valuer.
What happens if a valuation is lower than your offer?
If the valuation comes back short, it may mean that your preapproved mortgage no longer fulfils your lender’s LVR requirement. This could lead to a few different outcomes, depending on your exact situation:
- Higher rates/fees: To buy the property, you may need to switch to a different mortgage offer from your lender, one that allows a higher LVR. Generally, the higher your LVR, the higher the interest rates and/or fees a lender is likely to charge for a home loan, which could increase your monthly repayments.
- Lender’s Mortgage Insurance (LMI): If, after the valuation comes back, you’d be borrowing more than 80 per cent of a property’s value, your lender may need to take out an LMI policy to cover the higher risk if you default on your repayments. LMI covers the lender, not you, and most lenders will pass the cost of LMI on to you – the higher your LVR, the more you may have to pay. This can potentially add thousands (or even tens of thousands) of dollars to the upfront cost of buying a property.
- Missing out on your loan, and your property: If you aren’t able to work out a new arrangement with your mortgage lender, you may not be able to follow through with your offer to buy the property. Breaking settlement like this could mean forfeiting your deposit on the property, leaving you out of pocket.
What can you do if the house valuation is less than your offer?
- Pay a higher deposit: If you have the savings available, or can otherwise get more money together in a timely fashion, you may be able to make up the LVR shortfall by increasing your home loan deposit.
- Get a guarantor: Arranging for a parent or similarly close family member to guarantee your loan with the equity in their own property may be able to help make up for a valuation shortfall. Going guarantor comes with its own share of risks to consider, and it may be challenging to organise on short notice.
- Find another lender: If your preapproved home loan is no longer appropriate for this property purchase, you may be able to find another lender who can provide a mortgage. Keep in mind that you’ll likely have a limited amount of time to compare home loans and negotiate a new deal.
- Get a second valuation: Valuers sometimes err on the side of caution when calculating the value of the property. They also sometimes make mistakes, or rely on outdated or inaccurate data (e.g. not taking into account internal renovations to a property that changed the number of bedrooms, bathrooms etc.) If you can provide the valuer with new and accurate information to correct any errors found in the valuation, you may be able to get another shot.