Lenders like banks and credit unions need to be aware of the asset value that a borrower is mortgaging to determine the right quantum of loan that a borrower can avail of. Lenders like banks use a suite of tools and techniques to assess the value of a house or a piece of land (mortgaged property) before granting a loan. In this blog post, you will come across some common tools lenders use before sanctioning a loan.
How To Assess A Lender Investment?
When a bank lends money, it invests. The bank makes a profit on the loan given only when the borrower pays the loan and the interest back. Till then, the value of the mortgage covers the loan and interest. Hence, banks make use of lenders valuation services to gauge the worth of a mortgaged property.
Hiring A Lenders Valuation Services
Lenders valuation services are appraisal companies that advises the lender of the value of a property and any characteristics/ features of the property that may affect its future valuation. Usually, a valuation involves a brief survey lasting about thirty minutes to an hour. The survey allows the evaluator to establish the property’s value relative to its sales price. It helps the bank to assess if the property is valuable enough to secure the loan against it.
However, not all lenders valuation services are the same, and the type of valuation required will vary based on the factors discussed below.
- The type of property, whether it is a flat in a high-rise building or an isolated cottage, or a giant estate.
- The condition of the property at the time of soliciting the loan. Whether the property is well maintained, is in a dilapidated state, or needs minor repairs here and there.
However, when you take lenders valuation services, the surveyor will not thoroughly inspect the property or give any advice about required repairs or the property’s gas or electricity connection.
The value of the mortgaged property is crucial as it helps determine the LTV or the loan-to-value ratio that banks use to determine the amount of money that they can lend. The LTV ratio is a percentage of the mortgaged amount’s ratio to the property’s market value. If the LTV is low, the interest rates are lower, and if they are high, the interest rates are higher.
So if the LTV is eighty percent and the property costs fifty million dollars, a borrower gets only forty million dollars as a loan. Hence, calculating the accurate LTV percentage is crucial for lending institutions, and determining the accurate value of the mortgaged property. Herein lies the role that lender valuation services provide in the financial system.
Conclusion
Several factors, like market conditions, type of property, condition of the property, etc, determine its worth. It is impossible to hedge against all factors that may affect the valuation of a house or piece of land. Still, nonetheless, the valuation done by a lender valuation service is a valuable benchmark in determining a loan’s tenability.