Buying a home from parents or grandparents – Can I get a home loan for a bargain purchase?
Bargain buy: what is it?
Bargain is a banking term for what they call a deal where a property is sold ‘off market’ and below ‘market value’. Off-market means no real estate agent involved, so the buyer and seller either know each other, or it’s 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 therefore essentially gifting equity to the buyer.
The most common example is when mum and dad may be retiring or looking to move or downsize and will want to sell the family home. Sometimes children decide that they would like to purchase the property from their parents. Then the parents sometimes sell the property to the children for less than they could sell it on the open market to help their children or to keep the home in the family.
This is a bargain purchase and different Australian lenders have different policies on this.
How do banks view a bargain purchase when granting a home loan?
It is important to distinguish a bargain purchase from a sale where the buyer believes they are getting a great deal and buys the property well below market value. Banks will always lend and base their LVR and deposit requirements on the lower of the contract price or the appraisal, unless an exception applies. For example, if you buy a property for $500,000 and the valuation is higher than $550,000, the bank will base its 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, then the banks will base it on the lower of the two valuations.
Just saying you’ve got a great deal isn’t enough to get the bank to make an exception to the rule and base their deposit and LVR on a valuation that’s higher. There must be a compelling reason why the seller is selling below market value – the fact that they are bankrupt or deceased is not a compelling reason as theoretically what you are paying is market value as the market has judged that to be the value of the property on this day.
The main reason a bank would make an exception is when it’s a bargain purchase. If parents are selling to children, the banks understand that there is a reason, essentially of love and affection, why the parents are selling below market value. The result is that many lenders will base their LVR and deposit requirements on the actual valuation rather than the purchase price.
So what does this mean for me and how much of a deposit will I need?
When you buy a home in Australia and get a home loan, you need a deposit. Usually the absolute minimum deposit you will require will be 5% and then the bank will lend you the remaining 95% of the purchase price.
In the case of a bargain purchase, some banks will actually see the gift equity as your deposit. For example, if you buy a property from your parents for $400,000 that is appraised at $500,000, some banks will view the gifted equity of $100,000 as your deposit and therefore you can borrow the entire $400,000 without having to put up a deposit of your own .
Each bank has its own policy on this matter, with some lending only against the actual purchase price – ie. they can only lend 95% against the $400,000 purchase price or will only lend up to a maximum of 80% of the appraisal. But there are lenders who will lend the full 100% of the purchase price plus costs up to 90% of the appraisal without the customer having to put up any money of their own.
Here’s another example to illustrate how different bank policies work:
Let’s say David was going to buy his grandmother’s property so that his grandmother could move into a nursing home. The property was valued at $300,000 and his grandmother needed $270,000 to ensure she had enough to pay the housing bond etc. So the purchase price was below market value of $270,000 and is between related parties. Banks will see this as a bargain.
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, meaning David could borrow 100% of the purchase price and only have to pay his stamp duty and court costs.
However, another lender will only lend up to 80% 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 will need to contribute $30,000 of equity plus stamp duty.
Each lender has its own policy favorable loans for the purchase of a home therefore, it is recommended that you engage a mortgage broker who has experience in bargain purchases.
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