How Property Valuations Impact Mortgages
Understanding property valuations is essential for anyone navigating the mortgage landscape. Whether you're a first-time homebuyer or a homeowner looking to refinance, the value of your property plays a significant role in determining your mortgage options and loan terms.
Mortgage lenders use your home’s value to back the mortgage. If the sale price of the home is higher than the property valuation, you might not be approved for a mortgage. However, if you are trying to refinance your mortgage, a higher property valuation could be beneficial.
Property valuations are not static and are influenced by various factors. These can range from the home's square footage, age, location, and more. Accurately assessing these elements can provide a snapshot of your property's current worth, which impacts not only the amount you can borrow but also the risk perceived by your mortgage lender.
What Is a Property Valuation?
Property valuations are the process of determining the current worth of a property and are conducted by professional appraisers. Accurate valuations are essential for setting realistic sale prices, assessing mortgage amounts, and determining property taxes.
Valuations serve multiple purposes:
Lenders use valuations to assess risk and determine the maximum mortgage amount.
Lenders use valuations to understand the remaining economic life of a property.
Homeowners can leverage valuations to refinance or sell at the best price.
Government authorities rely on valuations for property tax assessments.
How Is Your Property Value Determined?
Property value is influenced by several key factors, including:
Location: Properties in desirable neighbourhoods with good amenities, schools, and low crime rates typically have higher values.
Size/square footage: A larger home or one with more usable space usually commands a higher price.
Age and condition: Newer homes or those in better condition are often valued higher than older, poorly maintained properties.
Features and upgrades: Any unique aspects or renovations like modern kitchens or a new roof can boost a property's value. Renovations and remodelling efforts can significantly affect the valuation.
Market conditions: The value of a property fluctuates based on supply and demand dynamics in the real estate market.
Comparable sales or "comps": Recent sale prices of similar properties nearby help establish a competitive market value.
Economic factors: Larger aspects of the economy like interest rates and employment rates influence property values indirectly by affecting buyer purchasing power.
How a Property Valuation Impacts Your Mortgage
Loan-to-Value Ratio
The loan-to-value (LTV) ratio is a metric lenders use to assess the risk of a mortgage and determine the type of mortgage rate that your home qualifies for. It is calculated as the mortgage amount divided by the appraised value of the property.
Mortgage rates are divided into buckets based on loan to value.
More than 80% loan to value = insured mortgages and the lowest rates
75-80% loan to value = rates are the highest
70-75% loan to value = rates are slightly lower
65-75% loan to value = rates are slightly lower again
65% or LESS loan to value = rates can be as low as insured rate on some properties.
Appraisals change loan to value and as a result can change mortgage rates.
Mortgage Approval - Purchase
Your mortgage lender might require a property valuation before approving your mortgage. Lenders use the appraised value to determine the LTV, and ultimately, how much they are willing to lend.
Mortgage lenders are more likely to require a property valuation in changing real estate markets, either where homes are selling for record-high prices and above the asking price or when prices are dropping and the bottom is falling out of the market. We’ve seen both of these scenarios in Alberta in the last 15 years. Essentially, the lender is trying to verify that the home is worth the mortgage amount.
If you are purchasing a home, a higher valuation really means nothing. The lender will lend to the loan to value agreed to on the lower of the purchase price or the appraised value. When it comes to purchases, if your property’s value matches the sales price or is higher, chances are, your mortgage will be approved. Conversely, if the valuation is low, you may need to provide a larger down payment, or the lender might not approve your mortgage.
Example Scenario: Suppose you plan to buy a house priced at $500,000. If the appraisal values the house at $450,000, you will be required to make up the additional $50,000 in down payment funds (from your own resources) or renegotiate the sale price with the seller.
If neither is possible, then you would not waive your financing condition and the sale of the home would fall through. This is why it’s important to always have a financing condition included in home offers, even though it can be tempting to remove it in competitive real estate markets.
Mortgage Approval - Refinancing
When homeowners seek to refinance their mortgage, lenders require an updated appraisal to assess the property's worth. Property valuations play a crucial role in the mortgage refinancing process, as they determine the current market value of a home, which can significantly impact refinancing options.
A higher valuation can lead to more favourable refinancing terms, such as ability to access equity for home improvements or other financial needs. Conversely, a lower valuation will likely limit your refinancing options.
Protip: It’s always better to refinance in a strong Real Estate Market. At the time of writing, July 2024, Alberta is a prime market for refinancing.
When Is an Appraisal Required?
If you are purchasing a home with less than 20% down payment, meaning an insured mortgage, it is highly unlikely that an appraisal on the property will be required. However, in rare cases (specifically in quickly changing real estate markets), the default mortgage insurance companies will require an appraisal. When this happens, it’s the mortgage insurer that pays for and orders the appraisal. This can increase the turnaround time on your mortgage by 3-5 business days.
If you are purchasing a home with 20% or more down payment, this is considered a conventional mortgage and an appraisal will be required about 50% of the time. In this case, the mortgage broker you’re working with will order a property appraisal via an approved appraiser (or appraisal company) for the specific lender that you’re working with. In this case, you pay for the appraisal and then the appraisal will be released to the lender.
If you are purchasing a rental property lenders require an appraisal 100% of the time.
How Much Does an Appraisal Cost?
Appraisal costs are determined by third parties and hard to predict. For an averaged sized, residential home, usually you want to budget on $350-450. If the home has a large lot or larger square footage, the appraisal costs increase.
If the property is rural and there is a large acreage to evaluate, or if the property is in an obscure location, the appraiser assigned will add a surcharge to the deal cover fuel expenses or their extra time required. In this case, the appraisal could cost upwards of $1,500.
Appraisal Process for Mortgages
In most cases, an appraiser will be assigned by your lender from a third party. They use a double-blind system, where neither the buyer nor the mortgage lender knows the appraiser. The goal is to keep the process as unbiased as possible, so the home appraiser doesn’t favour the buyer or the lender.
Appraisers must hold a valid licence and adhere to strict regulations to ensure unbiased and accurate valuations. In Canada, appraisers must be licensed with either the Canadian National Association of Real Estate Appraisers or the Appraisal Institute of Canada.
The appraisal process involves several key steps. First, the appraiser conducts an on-site inspection to evaluate the property's condition, location, and features. This inspection includes examining the exterior and interior of the home, noting any upgrades or repairs needed.
Next, the appraiser gathers data on comparable properties, market trends, and other relevant factors. Then, everything is detailed in your appraisal report. The report outlines the appraiser's findings and gives the estimated value or property valuation of the home. Your lender will use this report to determine your mortgage approval or refinancing amount.
How Will A Property Valuation Impact You?
Property valuations play a significant role in determining your mortgage options. To better understand if a property valuation will impact your mortgage, contact Spire Mortgage for expert advice.
