How does the bank value your home for a mortgage?
Greg Dickason from Corelogic, says that besides checking your credit history, and your capacity to pay, lenders check your actual loan collateral (the property you are buying), to make sure if they need to repossess and sell, they will recoup their money.
So how do lenders value your home?
In the normal process they will order an ‘Automated Valuation Model (AVM) Report, from a provider (like Corelogic). This machine-generated report will contain an estimated value calculated by looking at recent comparable sales in the surrounding area (so sales that are within a close proximity to your home with a similar land and floor size).
Interestingly, modern AVM models even self-learn by using AI techniques to weight the different factors and become more accurate through ‘machine learning’. An AVM also estimates its own accuracy. In what is known as a ‘Forecast Standard Deviation’, it can tell the lender how much to trust the figure returned.
Lenders can then choose to use an accurate AVM and lend to you, (which they will often do if you are providing a deposit of over 20% of the homes value). If the AVM is inaccurate, or the home is very unique or if your deposit is small, they may ‘cascade’ the valuation to a registered valuer working in your area.
Registered valuers are degree-qualified professionals who spend a considerable amount of time researching the area and walking through sold properties. They will undertake a physical inspection of the property and provide a comprehensive report that meets Bank and Valuation Industry standards.
On occasion, other forms of valuation may be carried out including a Desktop valuation.
So in conclusion, valuing a property ends up being a combination of machine learning models applied to property data, working in tandem with professional property valuers.
A version of this article first appeared in the Australian Financial Times.