Mortgage valuations determine how lenders lend.
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Mortgage valuation is a technical-sounding term that makes or breaks a loan application. Home buyers might think that just because they made a specific offer on a home, lenders will necessarily approve a mortgage for that offer amount. When housing prices rise and lending policies relax due to ready money and a booming economy, mortgage valuations might mean little more than looking at a home and approving its value. However, when home values fall, the economy falters and money-lending sources dry up, mortgage valuations loom large in determining the success or failure of a home purchase contract.
Lender appraisal or mortgage valuation is the process of appraising the market value of a property in order to determine how much money to loan a potential buyer. When a buyer makes an offer on a home, he bases the amount of the offer on the asking price, his own budget and the circumstances surrounding the sale. The potential buyer applies for a mortgage, and the lender analyzes the current market value of the property versus the loan amount to determine whether it is a good investment risk.
Mortgage valuation can either enable or put roadblocks in the way of completing a purchase offer on a home. Mortgage valuations, or appraisals, that come in significantly lower than the accepted price cause problems. Banks will typically only fund up to 80 percent of their appraisal amount. When the valuation amount is less than the proposed home price, the buyers face a gap in their financing.
Typically, mortgage valuation problems occur right in the middle of the purchase agreement escrow period, after both parties spend money and time in the transaction. Buyers spend on home inspections and sellers often pay for termite repair and other items, so the unpleasant news that a home does not appraise affects both buyer and seller. Buyers not protected by loan contingencies in the purchase agreement might lose their deposit money if financing falls through and they need to withdraw from the purchase. Sellers also face potential problems if they abruptly withdraw from the sales contract upon realizing they sold their home for too little money.
Both buyer and seller should do research to determine current home values prior to signing a purchase agreement. Sticking to a predetermined budget and avoiding bidding wars helps buyers avoid getting into mortgage valuation troubles. When mortgage valuations come in low, either the seller must accept a lower offer price to match the valuation, or the buyer must come up with the money in cash to complete the sale. Occasionally home appraisals come in way over the asking price, and sellers might balk at the sale, deciding to raise the asking price.
Having a substantial down payment helps avoid valuation problems. Solid down payments of 20 percent or more make lenders more confident about approving the loan. In the height of the housing boom in 2005, lenders and appraisers often worked in close conjunction. Following the housing crisis, revised regulations prevented real estate agents from establishing close ties with appraisers. Out-of-town appraisers sometimes wreak havoc on purchase agreements when unbalanced appraisals come in too low.
Barlowe, Barrett. "Mortgage Valuation Problems." Home Guides | SF Gate, http://homeguides.sfgate.com/mortgage-valuation-problems-6643.html. Accessed 18 April 2019.