How Do Banks Evaluate Your Property When You Apply For Home Loan?
Calculations are an integral part of the real estate business. It is for the same reason that while you may want to sell a property for a certain amount, you may or may not be able to given the finer characteristics of your property. In real estate, valuations become important. Here's what you need to know about property valuations.
More and more prospective homebuyers and investors are eyeing an investment in the near future. Banks offer home loan products and for mortgages, property evaluations become necessary for the simple reason that banks want to make sure they do not end up with a loss if you default. So, what is it that the banks check when they evaluate your property?
The location of the property
Homes are completed and delivered only when the supplier is able to conveniently manage the delivery. Similarly, banks will see whether the home loan that you are applying for is a property that is in a region where they service. It is also a way to ensure that the bank can service you at later stages, too. A property is valued in terms of the convenience factor. If it is easily accessible, you get a brownie point.
The use of the property
Different types of properties and the way they are being used, are valued differently. For instance, if you are using a residential unit as a warehouse, the valuation would be lower. Whether the property is vacant or is put on rent or being used by the owner as well as the nature of the property – residential, industrial, commercial or agricultural – will be valued differently.
Do note that banks may not prefer approving your home loan if they feel that the property is in a risk zone. Some cities, for instance, are more prone to earthquakes and are at a higher risk. Or say, some properties are in a flood-zone – such properties are not favourably valued.
The quality of the property
Not just homebuyers, the banker, who has to approve the loan, will also be obsessed with the quality. In the wake of unauthorised constructions that may have moved in the market because of the price advantage, banks strictly maintain that they would not approve loans on such constructions. As a homebuyer, you must ensure that you are buying an asset and not a liability not just from the valuation perspective but from the safety angle too.
The age of the property
Yes, the age matters. For example, in an independent house, the total useful age is considered to be 60 years. Suppose you are selling it after 20 years of construction, selling price minus depreciation is arrived at by this simple formula- Number of years after construction/ Total useful age of the building. In this case it is 20/60 = 1/3. Therefore, the remainder of the useful age is the price you can ask for. Here, the selling price would be 2/3rd the price of a newly constructed independent house in the same location. Banks calculate it this way. However, land costs do not depreciate and is calculated separately.
Do you have papers in place?
Unauthorised constructions cannot be an asset and legal constructions give you the luxury of getting hold of important documents such as the sanction plans, occupancy certificates, society registration documents and such other files. Keep these handy for bank's perusal.
How well did you maintain?
Did you know an old, maintained houses stand a better chance than relatively new and unkempt house? Valuations in the latter case are generally lower.