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.” Off the market means without a real estate agent involved for the buyer and seller to know each other or it is a private sale. Below market value refers to the situation where the seller is not selling the home for what the property is worth and is therefore essentially giving away the equity to the buyer.
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. Parents then sometimes 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 where the buyer believes they are getting a good deal and buying the property at a much lower than 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 higher by $ 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 was lower than the purchase price, banks will base it on the lower 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 valuation that was higher. There must be a compelling reason why the supplier is selling below market value: the fact that it is declared bankrupt or that it is a deceased 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 property’s value on that given day.
The main reason the bank would make an exception is for a favorable purchase. If parents are selling their children, banks understand that there is a reason, essentially out of love and affection, why parents are selling 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 home 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 remaining 95% of the purchase price.
In the case of a favorable purchase, some banks will view the value of the gift 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 equity there as your deposit and therefore you can borrow the entire $ 400,000 without having to put no money. own deposit.
Each bank has its own policy in this regard and some only make loans against the actual purchase price, that is, they can only lend 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 lend 100% of the purchase price plus costs of up to 90% of the valuation without the customer having to deposit their own cash.
Here’s 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 her 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 to be 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 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 at 80% of the LVR. 80% on $ 300,000 is $ 240,000. If David went to this lender, he would need a 20% deposit, which is $ 60,000. $ 30,000 is available in equity and therefore David would have to contribute $ 30,000 of his own cash plus stamp duty.
Each lender has its own policy on favorable buy home loans, so it is recommended that you hire a mortgage broker who is experienced in favorable buy.