Favourable Purchase: What is it?
A favourable purchase is a lending term for a transaction where a property is sold privately and under “market value”. A private sale means without a real estate agent involved so generally the buyer and seller know each other. Under “market value” refers to the situation where the seller is not selling the home for what the property is worth and are therefore in essence gifting the purchaser equity.
The best example is where mum and dad may be retiring or looking to move or downsize or have an investment property they would like to gift some equity to their children with. Sometimes the children decide they would like to purchase the property off their parents. The parents will then sometimes sell the property 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 called a favourable purchase and different lenders apply different policy on these loans.
How do different lenders view a favourable purchase when approving a home loan?
There is a big difference between a favourable purchase and from a sale where the buyer believes they are getting a great deal and buying the property at well below market value. Lenders will always lend and base their LVR and deposit requirements on the lesser of the contract of sale price or the valuation unless an exception applies. 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 deposit and LVR on a valuation that came in higher. The only reason why lenders make an exception is where a favourable purchase is involved.
If parents are selling to children the Lenders understand that there is a reason there, essentially being for 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 and not the purchase price.
So what does this mean to me and how much deposit will I need?
When purchasing a home in Australia and getting a home loan you need a deposit. Generally the absolute minimum deposit you would require would be 5% and the bank would then loan you the other 95% of the purchase price.
With a favourable purchase, some Lenders will actually accept the gift equity as your deposit. For example, if you were purchasing a property from your parents for $400,000 that was valued at $500,000, some Lenders will view the $100,000 gifted equity there as your deposit and therefore you can borrow the entire $400,000 without having to put in any deposit of your own. A Non Conforming Lender will lend to a maximum of 80% of the valuation on a Favourable Sale if you have a bad credit file.
Every lender has their own policy on favourable purchase home loans so it is recommend you engage a mortgage broker who has experience in favourable purchases.
