Favorable Purchase: What is it?
A favorable purchase is a banking term for what they call a transaction in which a property is sold “off the market” and below “market value.” Out of 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 essentially giving away the buyer’s equity.
The most common example is when mom and dad will be 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 their children for a lower price than they could sell on the open market to help their children or keep the house in the family.
This is a favorable purchase and different Australian lenders have different policies on this issue.
How do banks see a favorable purchase when approving a mortgage loan?
It is important to distinguish a favorable purchase from a sale in which 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 valuation, whichever is less, unless an exception applies. If, for example, you buy a property for $ 500,000 and the valuation was above $ 550,000, the bank will base your LVR and deposit requirements on the lower 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 valuation of the two.
Simply saying you have a great offer 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 deceased estate is not a compelling reason since, in theory, what they are paying It is the market value, since that is what the market has considered. the value of the property on that particular day.
The main reason the bank would make an exception is for a favorable purchase. If parents sell to children, banks understand that there is a reason, essentially out of love and affection, why 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 taking out a home loan, you need a deposit. Generally, the absolute minimum deposit you would require would be 5% and the bank would loan you the other 95% of the purchase price.
In the case of a favorable purchase, some banks will view the value of the donation as your deposit. For example, if you were buying a property from your parents for $ 400,000 that was valued at $ 500,000, some banks will see the $ 100,000 of equity donated there as your deposit, and therefore you can borrow the entire $ 400,000 without having to put nothing. own deposit.
Each bank has its own policy in this regard and some only lend against the actual purchase price, that is, they can lend only 95% against the purchase price of $ 400,000 or will only lend up to a maximum of 80% of the valuation. But there are lenders who will loan 100% of the purchase price plus costs up to 90% of the valuation without the customer having to put up their own cash.
Here is another example to illustrate how the different banking 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 the market value by $ 270,000 and it 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 requires a 10% deposit which is $ 30,000. $ 300,000 minus $ 30,000 leaves a loan amount of $ 270,000, which means that 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% of the LVR. 80% on $ 300,000 is $ 240,000. If David were to go to this lender, he would need a 20% deposit, which is $ 60,000. $ 30,000 is available in principal, and therefore David would need to contribute $ 30,000 of his own cash plus stamp duty.
Each lender has its own buy-in home loan policy, so it is recommended that you hire a mortgage broker who is experienced in buys.