Please help me understand something about mortgage valuations...

[BlueSprite]

We've already had ours and in an ideal world will exchange next week, but, and it's a big but, the lender's valuation stated it was worth what we were offering assuming relevant documentation is in place for the loft conversion.

The loft does not have building regs documentation (it was not converted by the current owner). Planning-wise, it should be fine - all within the original boundaries of the house with no dormer windows. The conversion was done over 10 years ago (no problems with it in that time being used as a bedroom), and we had a full structural survey that had a good look at how the loft was constructed and deemed it sufficient.

Our vendor has purchased an indemnity policy and the solicitor just has disclosed this to our lender. Our solicitor is happy with how things are proceeding, but everything now depends on our lender accepting this. Our solicitor thinks they will probably go back to the mortgage valuation and re-assess with this new information.

I'm very worried that this means they will undervalue the property, and what this means for us.

I've heard conflicting info about the valuation - it seems if it's below the offer price, you have a problem, yet we are 'only' borrowing 75% of that offer price, so surely even if the lender didn't think it worth what we're paying, they could still be confident of getting back the money we borrowed and more besides? (even taking into consideration the legal and admin fees of repossessing and selling on)

So - to put it MUCH more briefly - does the lender's valuation have to agree that it's worth what we are paying, or what we are actually borrowing? If the former, could somebody explain why as it seems unfair?

God, I'm so stressed about this!!

"Does the lender's valuation have to agree that it's worth what we are paying, or what we are actually borrowing? If the former, could somebody explain why as it seems unfair?"

The former. Sorry.

It's because if they think your house is only worth what you're borrowing, then their loan is at risk: if the value of the house drops further for any reason (market fall, damage, flood, etc.) then there is no 'slack' to protect their loan.

That said, 25% is a big deposit. It will make your lender more likely to accept the precautions you've taken. Also, in this situation, AFAIK, they usually provide a figure for what they think the house is worth as it stands... There may not be much difference, since you have a full structural report that shows the loft conversion is sound, so presumably it's only the paperwork that is missing: regularisation only costs hundreds, not thousands.

Make sure your solicitor makes the lender aware of the findings of the structural report, too.

Our house was valued below the price we paid for it (I suspect because of our dodgy loft conversion actually) but our lenders were fine as we had a large deposit although they did make us get a structural survey. I'm now shitting a brick that our lender for the remortgage will value the house below what we think it's worth and we'll be half way through reconverting the loft with no way to pay for it.

It doesnt necessarily have to agree with what you're buying it for, but if the valuer says its less than the purchase price, the bank would probably proceed (although not guaranteed) but they'd lend you 75% of the lower valuation. So, for instance, you think its worth 240k, you borrow 180k. Valuer says its worth 220k, bank says ok but max loan is 75% of 220k so 175k. You have to find the difference or renegotiate the mortgage deal (I.e you might gave to go for a product where you only need a 15 or 20% mortgage).

I totally understand how stressed you are bluesprite. I was worried sick about the valuation not matching the price I was paying and I was boring exactly 75% LTV too.
I think it's unlikely that they'll lower the valuation for lack of building regs. I'm surprised they're even asking because usually lenders don't care about that. Is it a small BS?
Having said that, in the worst case scenario you'll have a other LTV which may take you in the 75-80% bracket so higher interest. If your LTV is, say, 72% then even a slightly lower valuation may not even affect the interest rate, IYSWIM

Sorry error in example figures - should be 165k

This is a simplier way of setting out what will likely happen.

Say the house is currently valued at 200,000 and you are borrowing 75% i.e 150k. So yourr loan to value rate is 75%. If they revalue and say its only worth 175000 now.

You are still paying 200k, you still are borrowing 150k, your loan to value is now 150:175k, I.e is now 89%. This will make a big difference to your rate.

However, this is a big bargaining tool for getting the price reduced. As any person buying with a mortgage will have the same problem.

Thanks all, really useful - that has really cleared things up. Basically it looks like if they do undervalue it due to the loft, then the options are going to be making up the difference or choosing a different product that requires a lower deposit.

Obviously we'd try to bargain with the vendor first, and then if that fails, we've got to think whether it's worth proceeding if our mortgage term ends up a lot longer and we end up paying a lot more back. That's going to be a hard one - I think it would be worth it (brilliant and desirable location, gorgeous period terrace, and particularly spacious for its type), but DH almost certainly won't (very adverse to any risk).

Crap, we will probably fall out over this :(

I agree with MummytoMog - shitting a brick is a very apt description of how I'm feeling right now. I hope your remortgage works out.

And if we are to hand in our notice on our rented property without a huge overlap (which we can't afford), we've got to do it - and therefore exchange - by the end of this week!

Just been through a very similar case. It was an extension rather than a loft conversion though. Extended in the 1990s but no completion certificate. Not picked up as an issue in the previous sale which had also required a mortgage.

The survey was very positive and we really wanted the house so decided to go ahead. However, the bank referred the case back to the surveyor for a revaluation. This took about 10 very stressful days to be decided. For about 3 of those days, the bank sat on the information from our solicitor. Then the bank faxed the information to the surveying company and it got lost. It was then resent. The surveying company took another day to send it out to the surveyor, who was given a couple of days to decide. By about day 8 we had verbal confirmation that no adjustment in value was being made. This then fed back to the bank and had to go to the underwriter - I stayed on the phone whilst the decision was made. And finally the fax fed back to my solicitor to say that all was ok.

Anyway the bank were happy to lend. We are borrowing less than 30% of the value.

Fingers crossed for you.

As long as it covers the loan and is within your agreed max % loan to value for that deal then you should be ok. However, if your ltv was maximum 80% ie borrowing 150k of 200K (75%) but the valuation came through at 180k (83%) you may have an issue.