Favorable Purchase: What is it?
A fair buy is a banking term for what they call a transaction where a property is sold “off market” and below “market value.” Off the market means there is no real estate agent involved so the buyer and seller know each other or it is a private sale. Low market value refers to the situation where the seller is not selling the home for the value of the property and is therefore, in essence, giving away the buyer’s equity.
The most common example is when mom and dad are retiring or looking to move or downsize and want to sell the family home. Sometimes children decide that they would like to buy the property from their parents. Sometimes parents will sell the property to the children for less than what they could sell on the open market to help their children or keep the house in the family.
This is a fair buy and different Australian lenders apply different policies on this matter.
How do banks see a favorable purchase when approving a mortgage loan?
It is important to distinguish a favorable purchase from a sale where the buyer believes they are getting a great deal and buying the property at a price well below market value. Banks will always lend and base their LVR and deposit requirements on the sales contract price or appraisal, whichever is lower, unless an exception applies. If, for example, you buy a property for $500,000 and the valuation was higher than $550,000, the bank will base your LVR and deposit requirements on the lesser of the two, in this case the purchase price of $500,000. However, if the valuation is lower than the purchase price, banks will base it on the lower of the two valuations.
Simply saying you have a great deal is not enough for the bank to make an exception to the rule and base your deposit and LVR on a higher valuation. There must be a compelling reason why the seller is selling below market value – the fact that they are going bankrupt or a defunct estate is not a compelling reason since, in theory, what you are paying is the market value, since that is what the market has considered. the value of the property on that given day.
The main reason the bank would make an exception is when it comes to a favorable buy. If the parents sell to the children, the banks understand that there is a reason, essentially out of love and affection, why the parents sell below market value. The result is that many lenders will base their LVR and deposit requirements on the actual valuation and not the purchase price.
So what does this mean for me and how much deposit will I need?
When buying a house in Australia and getting a home loan, you need a deposit. Typically the absolute minimum deposit you would require would be 5% and the bank would lend you the other 95% of the purchase price.
In the case of a favorable purchase, some banks will see the value of the donation as your deposit. For example, if you were buying a $400,000 property from your parents that was valued at $500,000, some banks will see the $100,000 of donated equity there as your deposit, and therefore you can borrow the full $400,000 without having to make any own deposit. .
Each bank has its own policy in this regard and some only lend against the actual purchase price, that is, they may lend only 95% against the purchase price of $400,000 or they will only lend up to a maximum of 80% of the valuation. But there are lenders who will lend 100% of the purchase price plus costs up to 90% of the appraisal without the customer having to put up their own cash.
Here is another example to illustrate how different bank policies work:
Suppose David was going to buy his grandmother’s property so that his grandmother could move into a retirement home. The property was valued at $300,000 and his grandmother needed $270,000 to make sure she had enough to pay the lodging bond, etc. So the purchase price was below market value by $270,000 and is between related parties. Banks will consider this a favorable buy.
The bank will base the LVR/Deposit on the purchase price of $270,000. This particular lender required a 10% deposit which is $30,000. $300,000 minus $30,000 leaves a loan amount of $270,000, which means David could borrow 100% of the purchase price and would only have to pay stamp duty and legal costs.
However, another lender will only lend up to 80% LVR. 80% over $300,000 is $240,000. If David went to this lender, he would need a 20% deposit, which is $60,000. There is $30,000 of capital available, and therefore David would need to contribute $30,000 of his own cash plus stamp duty.
Each lender has its own policy on fair purchase mortgage loans, so it is recommended that you hire a mortgage broker who is experienced in fair purchases.
