What Is Mortgage Valuation?

Mortgage Valuation

First Published: September 10, 2009 ADawnJournal.com

Oscar Wilde once said that a cynic is someone who “knows the price of everything but the value of nothing”. This is a quote that is still used today, although it is more commonly applied in our society to economists. Whether or not it is a fair task, it certainly has some currency in a world where, more and more often, prices can be applied to anything, and are described as “valuations”. The time has come when “price” and “value” mean more or less the same thing for a large branch of society. When it comes to buying or selling a house, the word “valuation” will be bandied about with unerring regularity. The house you wish to buy must be independently valued before the bank will even consider giving you a mortgage.

In valuing a house, the bank is able to value your mortgage. They are, after all, forwarding the money to you in order that you buy the house, and they do not want to back an investment that they consider to be excessively priced. If the time comes when you are unable to pay back the mortgage and they need to repossess the house the bank will have to sell it, often below its market value, in order to recoup some or all of what they lent to you. In this case, if the bank had backed your purchase of a house at what they considered to be an inflated price, they would be in a far worse situation when it came to selling on the house that they have inherited. They would have lent you too much, recouped too little, and spent time and resources doing so.

In some ways, then, it is the economist’s job to know the price of everything and the value of nothing (as Mr Wilde would have had it), but they would be more likely to say that the price of something is its value, because that is what the average buyer would be willing to pay for it. More accurately perhaps, things that you already have possess a value, and things that you want have a price. Ensuring that you have the property valued before advancing the process of applying for a mortgage will save you time in the long run, and could avoid the unnecessary raising of hopes and expectations.

The banks’ valuation of your desired property could even work in your favour. If they are seen to value it at a price beneath the asking price on the property, then it means that the person selling the house is more likely to accept a lower offer. You could save yourself some money by trusting in the bank’s valuation – after all, they have people who are paid to be what Oscar Wilde would have considered cynics. Persuading people to part with a property they loved for a price which is less than they valued it at may seem cold-hearted to some – but in the end, they would not be selling it if they didn’t need the money.