What Happens When the Bank Values a Property Lower Than the Purchase Price?

You've found the house, negotiated a price and had your offer accepted. Then the lender's valuation comes back lower than the amount you've agreed to pay. What happens next?

Purchase price versus lender valuation

The purchase price is what you and the seller agree on. A lender valuation is an assessment of the property's value for lending purposes. It may consider comparable sales, location, condition, property features and market evidence. The figures don't always match, and a lower valuation doesn't automatically mean you've overpaid.

How a short valuation can affect your deposit

Imagine you've agreed to buy for $850,000, have a $170,000 deposit and plan to borrow $680,000. That's an 80% loan-to-value ratio (LVR) based on the purchase price.

Now imagine the lender values the property at $800,000. If the lender is willing to advance 80% of that valuation, the loan amount becomes $640,000. To complete the $850,000 purchase at that LVR, you would need $210,000 of your own funds—an extra $40,000, plus stamp duty and other purchase costs.

The valuation is $50,000 below the price, but the extra funds required in this example are $40,000. The actual result depends on lender policy, loan structure and your circumstances.

What does LVR mean for your loan?

LVR compares the amount borrowed with the value accepted by the lender. If you still borrowed $680,000 against the $800,000 valuation, your LVR would be 85%. Some lenders may consider that, subject to their criteria, but lenders mortgage insurance (LMI), extra costs or different loan conditions may apply. LMI generally protects the lender, not the borrower.

Why might a valuation come in low?

Comparable recent sales may not support the price, the property might have unusual features or need repairs, or there may be limited sales evidence. Valuations also involve professional judgement. In a competitive market, an agreed price can move ahead of the evidence a valuer is prepared to rely on.

What can you do if the valuation is short?

Depending on your circumstances, options worth investigating include contributing additional savings, assessing a higher-LVR loan, asking whether a valuation review is available where there are genuine errors or missing comparable sales, exploring another lender, or negotiating with the seller. None of these outcomes is guaranteed, and the time available before settlement matters.

Be careful with unconditional offers

In NSW, auction purchases generally don't have a cooling-off period. If you exchange an unconditional contract and the lender subsequently reduces or declines finance, you may still be obliged to complete the purchase. Failing to settle can have serious financial consequences, potentially including loss of deposit and further liability. Have a solicitor or conveyancer explain your contract and any finance conditions before committing.

Pre-approval is useful, but it isn't final loan approval. The lender may still need to assess the property and confirm outstanding conditions.

Five things to check before making an offer

1. Understand your borrowing position and available deposit. 2. Research comparable property sales. 3. Keep a buffer for unexpected costs. 4. Discuss the specific property and potential valuation issues with your broker early. 5. Get legal advice before signing a binding contract.

The bottom line

A short lender valuation can change the deposit you need, your LVR and the lending options available. It doesn't automatically end the purchase, but it's much easier to explore your options before you're contractually committed.

Buying around Newcastle, Lake Macquarie or the Hunter? I'm happy to help you understand the lending side before you make an offer. No unnecessary jargon—just a straightforward conversation about what you're trying to achieve.

Rusty Brown | Axiom Financial — Finance founded on principle. www.axiomfinancial.com.au

General information only. This article is not personal financial, tax or legal advice. Lending and valuations are subject to lender assessment and approval. Obtain legal advice about your contractual obligations before purchasing.