What Is An Appraisal Gap And How Does It Affect Your Mortgage?

An appraisal gap is when the estimated value of the property, as determined by an appraiser or lender, differs from the amount disclosed in the valuation reports. If there is a significant difference between the two figures, it can cause delays and problems with your home loan process.

How Does An Appraisal Gap Affect Your Home Loan?

When applying for a home loan, you must disclose the estimated property value so the Loan-to-Value Ratio (LVR) can be determined. Lenders consider this a crucial element when assessing whether or not to approve the loan. If the difference between the estimated property value and the actual market value is too great, it can cause your loan application to be rejected due to a high LVR. This could mean you have to wait a long time for your home loan approval or, worse, your application may get rejected.

What Happens When The Property’s Actual Worth Is Lower Than The Appraised Worth?

Suppose you stated in your loan application that your property was worth $400,000 and applied for a loan of $320,000. However, according to the lender’s valuation report, the property is worth only $350,000. Keeping your loan amount constant, that difference in value creates an appraisal gap of $50,000 ($400,000 minus $350,000), meaning your LVR will be higher than the lender intended initially. The lender assumes that you are a greater risk and may not approve the loan unless you show that you have other means to cover the difference. If you are applying without a mortgage broker, chances are you will have to redo your home loan application from scratch.

What Happens When The Actual Property Worth Is Higher Than The Appraised Worth?

Suppose you stated in your loan application that your property was worth $400,000 and applied for a loan of $320,000. However, according to the lender’s valuation report, the property is worth $450,000. Keeping your loan amount constant should increase your borrowing power with the lender. Still, some lenders may be willing to consider only the new property value and proposed loan amount to match the same LVR after redoing the application. The best thing to do is to convince the lender to consider making the changes without redoing your application. A mortgage broker can often do this on your behalf.

How To Avoid An Appraisal Gap

1. Search Online Before Estimating

Before estimating the property value, it is best to search for your property’s details online. CoreLogic’s property reports provide good insights into the real-estate market and can help you get a more realistic estimate of your property. To find your property’s details, including estimated market value, you can go to this site and type in the exact house number, street, suburb, state, and postcode.

You can read more about property reports here.

2. Get A Valuation Report From More Than One Bank

It’s best to get more than one valuation report from different lenders before you apply for a loan, especially if you are refinancing. That way, you can compare the reports and decide on a realistic estimate closer to your property’s actual market value. A mortgage broker will be able to help you with this.

Please note that lenders only accept their own valuation reports and not one from another lender. So, if you have more than one report showing different valuation figures, use the one that is valid with your lender.

3. Challenge the Appraised Value

Sometimes, the valuation report can be way off the amount you had estimated for your property’s worth. If you feel the report is incorrect, contact the valuer and challenge it. You can also get in touch with your mortgage broker to see if they can negotiate better terms on your behalf.

You can read more on challenging a valuation here.

4. Request That The Lender Apply A Different Valuation Method

Sometimes, a desktop valuation report can show a lower value than the actual market worth, leading to an appraisal gap. If that’s the case, you can request that the lender either go for a full valuation or get a physical inspection by their valuator instead. Keep in mind that lenders charge fees for a full inspection and may only be willing to do it for compelling reasons. In such a case, having a mortgage broker to help you negotiate with the lender can be of great value.

We Can Help!

At Home Loan Experts, we understand the complexities of an appraisal gap and its effect on the home loan process. Our mortgage brokers have years of experience helping clients negotiate better terms with lenders and get through the entire loan application process without any hassle.

Call us on 1300 889 743 or complete our free online assessment form to get started with your home loan process today!