An important step in buying a property, once you've had an offer accepted, is applying for a mortgage. Remember to use a mortgage broker to help you through this process.
A key stage in applying for a mortgage is the mortgage valuation, carried out by your chosen lender.
What is a Mortgage Valuation?
A mortgage valuation is an assessment by your mortgage lender that aims to investigate what the property is actually worth. Your lender will use this to see if it's worth the money you (and therefore they) are being asked to pay for it. The lender then decides if they should give you a mortgage on it.
A Down Valuation is when the valuation comes back showing the value of the property is less than what you and your lender have been asked to pay for it.
For example: If your seller has asked you to purchase the house for £200,000, but the mortgage valuation comes back stating that the house is worth £180,000, you’ve had a down valuation of £20,000.
How likely is a down valuation?
The likelihood of a down valuation is dependent on the current housing market. When the market is predicting a fall in house prices, then down valuations tend to be more prevalent, and likewise when the market is rising, they become less common.
For example, according to a Bankrate report, during the Covid-19 pandemic when falls of 5-15% were being forecast, down valuations happened much more frequently.
It’s also worth noting that Down Valuations most commonly affect those remortgaging their home rather than those buying or selling.
What happens when I get a down valuation?
When you get a down valuation, your lender will likely make one of two decisions. They may decide that the risk is too high and withdraw the mortgage, meaning you will likely lose the sale, unless your broker can find another lender that will be happy to support the purchase.
Alternatively, they may decide to give you the mortgage, but at a higher loan to value, meaning they will pay less towards the house and you will have to pay a higher deposit. This is problematic if you haven’t extra funds to put into the property and, unless you can renegotiate the price with the vendor, you may lose the purchase if you cannot afford it.
What can I do next?
While it may seem like a big problem, getting a down valuation doesn’t have to mean the end of the road. There are some things you can do to ultimately get the sale back on track. Having a mortgage broker to help with problems like this can be invaluable.
You could try challenging the valuation, essentially asking the lender to rethink their findings and come to a new conclusion on the property. While this does sometimes work, it’s important to know that it is rare. The lender is not likely to want to admit they were wrong and change their mind on a risk to their investments. Challenging could also take some time, holding up your sale and possibly leading the seller to go elsewhere.
If your lender has not offered it already, and you think you can afford it, you could offer to pay the difference, for example you would pay the extra £20,000 needed to reach the deposit set out in our earlier example. This will probably be your quickest option, but remember to be absolutely sure you have the budget for it.
Though it will take more time, you could go to a new lender and have them value the home instead. If they come back with a better valuation, you can go ahead with your buying timeline. However, there is the risk that they will also come back with a down valuation. Although, this could help you with the next option.
Perhaps the most common and reliable reaction to a down valuation is to go to the seller and try and negotiate with them to lower the price on the property. You now, after all, have evidence from a professional source that their property is not worth what they are asking for it.
If you’ve got valuations from multiple lenders, this evidence becomes even more compelling. On top of that, if they’ve had the house on the market for a while, or struggled to sell it so far, it all suggests the price is too high.
Remember though that your ability to renegotiate does depend partly on why the down valuation was given. If it was a structural reason for example, like damp or subsidence this will be compleeing evidence. However, a down valuation due to a view on the market will be easier for a seller to challenge.
Of course, the seller is never obliged to lower their price, meaning there is a chance they will choose not to, and you’ll have to try something else. Depending how quickly they are looking to sell, it may be in their best interest to accept a lower offer from you, meaning it’s always worth having the conversation. If the seller is in a chain, or has struggled to get a buyer up until this point, you may have more of a chance and the seller might be able to reduce the amount they are paying for their next property. Ideally discuss this with the estate agent about the seller’s expectations and flexibility, agents don’t always look to get the highest price, they can also be practical when it comes to holding a sale and a chain together.
Down valuations don’t have to mean the end of the road – but bear in mind that higher loan to values can put you at more risk of high costs. Make sure the property is really worth it before committing any further.