How Financial Institutions Value Your Property in mortgage loan
If you have ever applied for a Home Loan or a Loan Against Property, you might have wondered how the lender decides the value of your property, why the lender values your property lower than what you believe, or what happens during the property valuation.
Most of us do not get transparent answers from our lenders. Sometimes they say that this is the company policy but do not provide concrete answers. But understanding how property valuation works can help you to negotiate better, get higher eligibility, and avoid last-minute surprises.
To help you understand better, this blog breaks down the entire process in a simple way. For that we need to understand what Property Valuation is.
Property Valuation
Property Valuation is the process through which the lender accesses the current market value of the property. The valuation of the property is done by the internal or outsourced team of the lender which physically inspects the property and prepare a property valuation report based on some pre-fixed parameters which we will be discussing below.
The Property Valuation Report helps the lender to decide:
- How much loan they can give
- Whether your property is a safe collateral
- How easily the lender can recover money if something goes wrong
This value becomes the base for calculating your LTV (Loan-to-Value).
Why Property Valuation Matters for Borrowers?
The value of the property play an important role in the value of the loan as Higher valuation leads to higher loan eligibility and vice versa. Accurate Property valuations reduce processing delays by the lender, and it ensures transparency between the borrower and the lender while protecting the interests of the lender and borrower.
How Financial Institutions value the Property
Financial institutions do not rely on the estimated value or market rumors for the valuation of the Property, they follow a structured, regulated and step-by-step process of defining the value of the property. This is how the lender actually values your property:
1. Physical Verification of the Property
Lender conducts a Physical Verification of the Property with its internal or outsourced team in which the valuer inspects the condition of the property, construction quality, age of the property, Layout and Structural strength and the maintenance level of the property.
2. Location Advantage and Neighbourhood Assessment
Location is the main driver in the value of the property, as an area with nearby amenities and infrastructure development attracts a relatively higher market value than area with no proper amenities and Infrastructure availability. Valuer checks for Road Connectivity, Commercial activity nearby, Schools, Hospitals, Future development plans, etc., for the valuation.
3. Legal Verification and Documents Scrutiny
The Lender examines Property Papers, Ownership chain, Encumbrance Certificate, Approved Building Plan, Occupancy status, Sanctioned Layout and any pending legal cases. The valuer decreases the value of the property if any irregularities are found in the Legal Verification and Documents Scrutiny.
4. Market Value vs Distress Value
This is where most of the borrowers gets confused, Financial Institutions usually lend on the distress value of the property due to which many borrowers feel that the valuation is low as per they have assumed. Market value is the rate at which the property can be sold today, and Distress Value is a conservative estimate of the property which is derived by assessing the property’s condition, market value and the urgency of the sale.
5. Comparable Sales Method
With this method the valuer compares the similar properties which are getting sold in the area. The valuer checks recent sale deeds in the area, Govt circle rates vs. market rates, Builder pricing (for apartments) and the demand for the property in the area. This gives a realistic selling price reference for the lender.
6. Construction Cost Method
This method is commonly used for valuation of bungalows, plots with construction and standalone homes. With this method of property valuation, the valuer decides the property value is based on cost of land, cost of construction, Depreciation on building age, Cost of building material required, etc. This method is commonly used in property valuation for home loans.
7. Rental Income Method
If the property is earning rent, then valuing the property only based on the market value of the property then it is not fair. For commercial properties earning rent, the valuer derives the value of the property by analysing the rental income, rental yield, tenant stability and the market value of the property. This method often increases the loan eligibility for the borrower.
Why Valuation by lender is lower than your expectations?
Lenders prefer safer valuations to manage the credit risk due to which they offer relatively lower property valuations. Some common reasons for the lower property valuation:
- Banks use conservative distress values
- The local market may be overpriced
- Old construction or poor maintenance
- Legal issues or missing approvals
- Property situated in congested or low-demand areas
- Recent sales data is low in your area
How to Increase Your Property Valuation
An informed borrower can strategically improve your property valuation by:
- Keeping documents updated including Property Documents, any NOCs, Sanctioned construction plan, etc.
- Maintaining property well by ensuring fresh paints, clean surroundings and good repairs, etc.
- Showing stable rental income in commercial and rental properties increases your property valuation.
Final Takeaway
Understanding how lenders value your property provide you a better understanding of the entire loan process. When you are aware about what documents the bank is checking and conditions for the valuation you can be prepared and less likely to face last-minute surprises. It becomes easier to estimate the predict the eligible loan amount and even negotiate for better terms if needed. At the end of the day, a properly valued property makes your loan journey smoother, quicker and reasonable loan eligibility.
