How Do Banks Evaluate Property When You Apply for a Home Loan
Calculations are an integral part of the real estate business. It is for the samereason that while you may want to sell a property for a certain amount, you mayor may not be able to given the finer characteristics of your property. In realestate, valuations become important. Here's what you need to know aboutproperty valuations.
More and more prospective homebuyers and investors are eyeing aninvestment in the near future. Banks offer home loan products and formortgages, property evaluations become necessary for the simple reason thatbanks want to make sure they do not end up with a loss if you default. So, whatis it that the banks check when they evaluate your property?
The location of the propertyHomes are completed and delivered only when thesupplier is able to conveniently manage thedelivery. Similarly, banks will see whether the homeloan that you are applying for is a property that isin a region where they service. It is also a way toensure that the bank can service you at laterstages, too. A property is valued in terms of theconvenience factor. If it is easily accessible, youget a brownie point.
The use of the propertyDifferent types of properties and the way they arebeing used, are valued differently. For instance, ifyou are using a residential unit as a warehouse, thevaluation would be lower. Whether the property isvacant or is put on rent or being used by the owneras well as the nature of the property - residential,industrial, commercial or agricultural - will bevalued differently.Do note that banks may not prefer approving your home loan if they feel that the property is in a riskzone. Some cities, for instance, are more prone tonatural disasters and are at a higher risk. Or say,some properties are in a flood-zone, like propertieslocated on the bank of the Vaal river, suchproperties are not favourably valued.
The quality of the propertyNot just homebuyers, the banker, who has toapprove the loan, will also be obsessed with thequality. In the wake of unauthorised constructionsthat may have moved in the market because of theprice advantage, banks strictly maintain that theywould not approve loans on such constructions.As a homebuyer, you must ensure that you arebuying an asset and not a liability not just from thevaluation perspective but from the safety angletoo.
The age of the propertyYes, the age matters. For example, in anindependent house, the total useful age isconsidered to be 60 years. Suppose you are sellingit after 20 years of construction, selling price minusdepreciation is arrived at by this simple formulaNumber of years after construction/ Total usefulage of the building. In this case it is 20/60 = 1/3.Therefore, the remainder of the useful age is theprice you can ask for. Here, the selling price wouldbe 2/3rd the price of a newly constructedindependent house in the same location. Bankscalculate it this way. However, land costs do notdepreciate and is calculated separately.
Do you have papers in place?Unauthorised constructions cannot be an assetand legal constructions give you the luxury ofgetting hold of important documents such as thesanction plans, occupancy certificates, societyregistration documents and such other files. Keepthese handy for bank's perusal.
How well did you maintain?Did you know an old, maintained houses stand abetter chance than relatively new and unkempthouse? Valuations in the latter case are generallylower.
Author: Sneha Sharon Mammen