What is Bank Valuation vs. Market Valuation of a Home?

bank valuation, market valuation, buying a home, realtor selling a home, happy family purchasing their house, home's market value, home appraisal, property value, real estate, happy realtor helping a family search for a home

You’ve found your dream home, but before you complete the purchase of your new home, your bank or lender will value the property to determine the market value, right? Wrong! When you’re buying a home or refinancing your loan, banks often need to get what is called a bank valuation. Banks need to know they’re lending you the money responsibly. While it’s true that when you apply for a mortgage, your lender will set a value for the property you’re buying, the figure they come up with is not necessarily an accurate representation of the property’s value.

The Difference Between Bank Valuation and Market Value

The bank valuation generally will, in most cases, be lower than the recent market value because they are different. In addition to how much money to loan the borrower, a lender uses a bank valuation to figure out how much they might get if the property were sold. The lender will only sell a home where the borrower has serious financial issues, or is really late on the monthly mortgage payments so they may not be able to sell the property at the right time or circumstances. The property's market value, however, is how much the homeowner would get for the home if it was sold by the owner. When selling a home, watching and monitoring the sale of other homes on the market is a crucial step. The seller then waits for the right time and the best achievable price, before selling the home. When you want to buy a new property, refinance or access the equity in your home, banks have to make sure they aren’t lending you more than the value of the property. They use it to determine the value of your property that will act as security against your home loan. It means that if you have difficulties with the loan and you’re no longer able to make the repayments, the lender may have to sell the property to pay back the loan.

When banks do a valuation they work out the value by looking at the home for details such as:

  • General location and council zoning
  • Overall size and number of rooms
  • Vehicle access to the property
  • Building structure and condition

The fair market value of your home is used by lenders to work out a refinance or home equity loan, by the tax assessor to calculate your municipal property taxes and by insurers to set homeowners insurance premiums. The fair market value is the price your home would sell for if you placed it on the open market for a reasonable amount of time, and both parties--you and potential buyers--acted on your best interests. Knowing what a property would sell for in an ideal market is not a straightforward calculation. There is no set formula to calculate fair market value, but there are established methods you can use to arrive at an educated estimate.

How to Find Your Home's Market Value

To find out your property's market value, you should speak to a qualified appraisal service and request an experienced appraiser to come to your property. A bank valuation serves as an internal regulatory and cautionary tool for lenders that reflects what reasonable amount can be recovered should it be necessary to reclaim and sell the property in a distressed state. This is the reason why the valuation price has to be lower than the market value. A bank valuation also protects the bank from risks. The market value is simply what the home is being sold for - at a particular time and in a specific market. Finding the right home is the most important part of buying a house. Finding the right mortgage is just as important to set a solid foundation for successful homeownership. Robins Financial offers mortgage loans and expertise to help you with the decisions you need to make along the way, so apply for a mortgage loan today. You can also use our mortgage calculators to help you make informed decisions about your biggest loan.

Did you find this video helpful? Subscribe to our YouTube Channel for all of our financial education videos.