As part of the mortgage process the bank will request a valuation of the property that you are purchasing, whether a secondary purchase or off-plan. In some cases this valuation can come back lower than the price of the property – which can cause a bit of hurdle in the process. In this blog we cover bank valuations and what you can do if it comes back lower than the purchase price.
It can seem like a nightmare; the bank has had a valuation carried out on the property you are purchasing and has come back with a lower figure than you expected – they’ll provide you with a mortgage, but not one big enough to afford the property.
Simply put, the bank’s valuation company doesn’t think the property is worth the asking price.
Suddenly you find yourself in the position of not being able to afford the home you believed was soon to be yours. How can this happen and more importantly, what can you do?
What is a down valuation?
As part of the buying process, the bank instructs an independent valuation of the property, generally by a third-party company. The aim of the valuation is for the bank to determine the true value of the property and to check that it matches with the price you are set to pay for it.
Sometimes that valuation comes up short, which means the size of the requested mortgage is too high and the bank won’t lend you the amount you need to purchase the property. This is more of a common occurrence when it comes to off-plan purchases when you are looking to get a mortgage to cover the final handover payment to the developer upon completion.
Remember that your mortgage amount is based on a loan-to-value (LTV) and the bank will be keen to maintain this ratio for the loan. If the value of the property drops in their eyes, so will the relative mortgage size. For example, a 75% LTV mortgage against a property valued at AED 1,000,000 totals AED 750,000. Should the property value drop to AED 950,000 then the same 75% LTV represents a maximum loan of only AED 712,500 – a drop of 37,500 dirhams.
A down valuation can happen due to a number of things; perhaps the market has changed since your initial purchase offer and mortgage pre-approval stage, or maybe the property has been over-valued throughout the process and the reality is a little harsher than you would like. The independent valuation is a well-researched calculation which will take into account the trend in current market values and recent sales of comparable properties in the area.
In the case of a secondary purchase (buying a home that is already built) the worst this can lead to is you losing the capability to buy. If you are purchasing an off-plan property, however, you will already have invested heavily and it may not be as easy to pull out of the purchase.
How can you protect yourself from a down valuation?
One of the most important things that you can do is set out a valuation clause in the MOU (Memorandum of Understanding). This part of the contract is the early agreement of sale, and it is possible to include a section within it that states that you are not obligated to complete the purchase should the bank down value the property.
This will give you enough leverage that you can renegotiate the valuation after the bank report, and leaves you open to walking away if you need to.
Using both a reputable real estate broker and mortgage broker means you can easily include a valuation clause in your MOU. Your real estate broker and mortgage broker will be able to go over the paperwork with you, making sure you understand exactly what you are agreeing to and adjusting it if necessary to include such protection.
What to do if you receive a down valuation?
There really are three main options available to you:
Challenge the bank’s independent valuation
It is possible that you simply disagree with the valuation that has been made, and you are well within your rights to challenge the figure with the bank. It may mean arranging another valuation, and paying the additional fees that this would entail. If a second opinion falls in your favour then you may be able to move ahead to purchase without any issues however, be aware that not all banks will agree to adjust so it is worth discussing this with a mortgage broker should the situation arise.
Utilise your leverage with the seller to reduce the purchase price
Just as you are keen to buy, the seller is keen to sell. The disappointing news of a down valuation affects them almost as much as it does you, and you may find yourself being able to bargain with them to lower the asking price to fit the new figure.
Ultimately, your purchase falling through is likely to put them back to the start of their selling cycle so they may be more willing to negotiate than you might think.
Bridge the difference with other funds
If you do have savings or other funds that you can use to make up the difference, then you are always able to lean on this to make up the shortfall.
Be aware that using your own funds to bridge the gap will mean you are accepting that you are paying more for the property than the bank believes it is worth, so it is important to do your own research to make sure it is worthwhile. If you are looking at your dream home rather than an investment, however, then this is likely not a problem.
Contact Mortgage Finder for specialist advice
In almost all instances, it’s worth contacting an independent mortgage broker like Mortgage Finder. We have a great deal of experience dealing with down valuations and can look at your situation on a specific case basis.
This is especially true if you are dealing with an off-plan down valuation, where the contract and prior investment in the property can put you in a very delicate position with limited options.
Give us a call today, or fill in our contact form to have one of our expert advisors get back to you soon.