Every loan -financed property purchase inevitably poses the question of how high the mortgage lending value of the property is. When you finance with an annuity loan (formerly a mortgage) , the property serves as the primary security for your bank. Accordingly, it is not the market value that plays an essential role for the loan approval, but the mortgage lending value. This amount tells you what you should know about it.
What is the mortgage lending value of a property?
Most real estate financing is secured by a land charge. This is the market value that the bank would get in a foreclosure auction of the property if you defaulted on payment. The determination of the mortgage lending value serves solely for the security of the bank and is not directly related to the purchase price of the property. Before the credit decision is made, the calculation is carried out using software, which leads to inaccuracies in the result and the value determined is usually lower than the real market value. You should also know that 100% mortgage lending financing is generally not possible. This would increase the bank's risk of loss in the event of a foreclosure auction. The value can also be reduced by a lending limit. A bank uses this method to compensate for the risk of impairment due to market changes and external influences.
How do banks determine the amount to be financed for the property?
There are various methods for determining the mortgage lending value of real estate. The material value method is most often used, taking into account all essential property and real estate data. For private real estate that is used by the owner himself, the discounted earnings method and the comparative value method are less common. Often the three methods are combined and a comparison is made, for example between the real value and the income value. The mortgage lending value of a property is on average between 70 and 90 percent of the purchase price that you pay for the property. Conversely, this means that you have to finance the difference and the incidental purchase costs from your equity. In most cases, the result of the loan value is checked again by an independent appraiser from the bank after the purchase. The bank that commissioned the appraisal bears the costs for this.
Is there a difference between market value and mortgage lending value?
As a rule, the mortgage lending value is always lower than the market value. It can be seen very clearly in the amount of the total purchase price in comparison to the result of the mortgage lending value calculation by the lending bank.
- The market value is the market value, which describes the current purchase price of a property
- The mortgage lending value is a purchase price that can be achieved in the future, which, however, relates to the minimum amount when the property is sold
Apparently, the mortgage lending value looks very arbitrary in the context of the market value. But you have to take into account that the bank will protect itself by downgrading this value for the worst-case scenario, in particular for the borrower's insolvency. External factors such as a decrease in the value of the property due to refurbishments and modernization measures not being carried out are also included in the mortgage lending value. So there are various reasons that lead to a higher difference between the lending value and the market value. The market value is included in the calculation of the mortgage lending value.
Full financing only possible under certain conditions!
In some cases, you can get a loan commitment beyond the mortgage lending value of the property. But the conditions for 100% financing or 110% financing (full financing) are strict. A basic requirement is the fact of the 40 percent rule, which states that you do not invest more than 40 percent of your income in repaying the loan per month. If your bank approves financing above the mortgage lending value, the property is usually located in a popular region with high demand for residential property. Here, the lending bank sees the chance, apart from calculating the mortgage lending value, of achieving a higher amount in the event of a sale. Whether you get full funding depends on many other factors. In addition to the location and the market-relevant facts about the property, as well as your income, you can increase your chances of full financing with additional securities . These are always individual decisions, the basis of which remains a secret of the bank.
Mortgage lending value of the property is crucial for financing
Most one- and two-family houses and condominiums are financed at least partially through a bank. As soon as you submit a loan application and have a property in mind, the bank will request certain key data, the exposé and further information about the property from you. These data are necessary to determine the mortgage lending value in order to be able to decide on your financing. The calculation is mostly based on the real value method, whereby elements of the comparative value and income value determination can also be included. In the end, the bank usually comes up with a result that is below the market value. In most cases, the bank still draws a lending limit, which is identical to the maximum value of the loan. Only if the upper limit is missing is there any possibility of one of the rarely undertaken and difficult to obtain full financing.
My name is Martina Lange and I prefer to write journalistic texts on the topics of finance and medicine. I also love to write professional articles of all kinds. I can find my way into almost any topic and am always happy when I have even more knowledge after finishing a text. As a freelance writer, I am passionate about writing for creditSUN.