Buying a Home Off of Parents or Grandparents – Can I Get a Home Loan for a Favourable buy?
Favourable buy: What is it?
A favourable buy is a bank term for what they call a transaction where a character is sold “off market” and under “market value”. Off market method without a real estate agent involved so the buyer and seller either know each other or it’s a private sale. Under market value refers to the situation where the seller is not selling the home for what the character is worth and are consequently basically gifting the purchaser equity.
The most shared example is where mum and dad may be retiring or looking to move or downsize and will want to sell the family home. Sometimes the children decide they would like to buy the character off their parents. The parents will then sometimes sell the character to the kids for a price less than what they could sell on the open market to help their kids out or keep the home in the family.
This is a favourable buy and different Australian lenders apply different policy on this issue.
How do the edges view a favourable buy when approving a home loan?
It is important to discriminate a favourable buy from a sale where the buyer believes they are getting a great deal and buying the character at well below market value. edges will always lend and base their LVR and place requirements on the lesser of the contract of sale price or the valuation unless an exception applies. If for example you buy a character for $500,000 and the valuation did come in higher at $550,000, the bank will base their LVR and place requirements on the lesser of the two, in this case the buy price of $500,000. If however the valuation came in lower than the buy price then the edges will base it on the lower of the two being the valuation.
Just stating that you have got a great deal is not sufficient to get the bank to make an exception to the rule and base their place and LVR on a valuation that came in higher. There must be a powerful reason why the vendor is selling under market value – the fact they are going bankrupt or it’s a deceased estate is not a powerful reason as, theoretically, what you are paying is market value as that is what the market has deemed the character worth on that given day.
The dominant reason why the bank would make an exception is where a favourable buy is involved. If parents are selling to children the edges understand that there is a reason there, essentially being for love and fondness, why the parents are selling below market value. The consequence is that many lenders will base their LVR and place requirements on the actual valuation and not the buy price.
So what does this average to me and how much place will I need?
When purchasing a home in Australia and getting a home loan you need a place. Generally the absolute minimum place you would require would be 5% and the bank would then loan you the other 95% of the buy price.
In a case of a favourable buy, some edges will truly see the gift equity as your place. For example, if you were purchasing a character from your parents for $400,000 that was valued at $500,000, some edges will view the $100,000 gifted equity there as your place and consequently you can borrow the complete $400,000 without having to put in any place of your own.
Every bank has their own policy on this with some only lending against the actual buy price – ie, they might only lend 95% against the $400,000 buy price or will only lend to a maximum of 80% of the valuation. But there are lenders that will lend the complete 100% of buy price plus costs up to 90% of valuation without the client having to put in any cash of their own.
Here is another example to illustrate how the different bank policies work:
Assume David was going to buy his grandmothers character so his grandmother could move into a retirement home. The character valued at $300,000 and his grandmother needed $270,000 to ensure she had enough to pay the accommodation bond etc. So the buy price was below market value at $270,000 and it is between related parties. The edges will consider this a favourable buy.
The bank will base the LVR/place on the buy price of $270,000. This particular lender required a 10% place which is $30,000. $300,000 less $30,000 leaves a loan amount of $270,000 which method that David could borrow 100% of the buy price and would only have to pay for his stamp duty and legal costs.
Another lender though will only lend to 80% LVR. 80% on $300,000 is $240,000. If David went to this lender he would need a 20% place which is $60,000. $30,000 is obtainable in equity and consequently David would need to contribute $30,000 of his own cash plus stamp duty.
Every lender has their own policy on favourable buy home loans so it is recommend you include a mortgage broker who has experience in favourable purchases.