Overestimating the cost of an apartment with a mortgage

When providing mortgage lending, the bank focuses on the price of the property that will be purchased with its help.

However, this price is not always fair - it is quite common to overestimate it, which can occur by agreement between the seller and the buyer. This is far from a new scheme. With the help of an increase, the buyer receives a larger amount than in the usual case, which allows him to make a down payment using the bank’s funds. Banks prevent the implementation of such a scheme, and it is also illegal. This means that overestimating the cost of an apartment with a mortgage is fraught with risk.

Home mortgage

A mortgage is a targeted long-term loan issued for the purchase of housing, in which the purchased housing itself acts as collateral. Or, instead, other real estate owned by the borrower can be used as collateral.

A mortgage provides much lower rates than a regular loan, but on the other hand, to obtain it you need to meet the strict requirements of banks, first of all, have a permanent job that provides a stable and fairly high income. Another important requirement is the down payment, which is usually 10-30% of the price of the purchased home.

The mortgage market is dominated by the same banks that are leaders in the country in the field of banking services in general, primarily Sberbank and VTB, and, in addition, there are also specialized financial organizations that focus primarily on mortgages. Some of the banks provide mortgage loans under certain government programs with partial government financing, which can further reduce the interest rate for the consumer.

Required documents

Before completing the transaction, select the bank that is most suitable for you according to all lending conditions. After that, submit a preliminary loan application. And only after the bank’s approval, count on the success of the transaction. Since not all credit institutions can approve a large loan amount for a certain borrower’s income. Some may require additional guarantees.

Bank approval is usually valid for 1-3 months, during which time in most cases you will be able to choose the option that suits you. Or, if necessary, you can extend your application by resubmitting documents.

Each bank may have its own requirements for documents to complete a transaction using a mortgage. But there is a standard package of papers that will be required in all cases:

expert assessment of the cost of housing according to the market (it should be the same or slightly different from the price specified by you in the purchase and sale agreement);
advance agreement , which will indicate the amount of the amount offset as the down payment (here you must take into account the bank’s requirements, how much interest the minimum down payment should be);
a receipt from the seller, it will be confirmation of the actual receipt of funds by the seller;
draft agreement.

Currently, many banks provide mortgages, since this type of lending is very profitable for credit institutions. Therefore, many banks accommodate their clients halfway and do not pay attention to the 10-20% overstatement in the cost of housing.

An initial fee

The down payment is a certain portion of the cost of the property purchased with a mortgage, paid by the borrower immediately. There are also programs without it, but they are usually less profitable because they are riskier for banks and are not available to all categories of citizens. Typically the mortgage payment is about 15-20%, but sometimes it can be less or, conversely, more.

That is, before going to the bank you will need to collect this amount, which is often not easy, because it is a lot of money. If time is limited and there is no way to collect a down payment, but at the same time you really want to get a mortgage, buyers may use inflating the cost of the property they are purchasing.

The down payment is used by the bank as confirmation that the borrower is solvent, and based on it, the loan rate is set. The larger the amount the client agrees to deposit at once, the more favorable rate he will be able to qualify for, and the likelihood of the bank approving the application will be higher.

In addition, there are two more reasons to use a down payment:

The requirement of the Central Bank, when providing a mortgage without it, to reserve a larger volume of funds, which is unprofitable for banks, because they could make these funds work.
Minimizing risks - the down payment becomes a guarantee that if the borrower is unable to pay off and has to sell the property, then even if it is sold below the market price, taking into account the down payment, the bank will still return all its funds.

As practice shows, the down payment is, in fact, effective, and when comparing loan programs with and without it, it turns out that those borrowers who started with this contribution were more disciplined when paying off their debt. Thus, it becomes a filter that protects the bank from unscrupulous or insolvent clients, but at the same time a barrier that prevents some citizens who are willing to pay in the future, but do not have enough money for a down payment, from obtaining a mortgage. Moreover, the larger this contribution, the more lenient the conditions will be.

Do banks give more money than the mortgaged apartment is worth?

When a borrower comes to the bank for a mortgage and the loan is secured only by collateral housing, the loan amount cannot exceed the appraised value of the apartment. The bank takes money to issue loans to the population from the Central Bank at interest. The Central Bank requires the bank to ensure that the mortgage is secured by real estate that is worth more than the size of the loan. A mortgage is a multi-year loan that is associated with a large number of risks, so lenders are insured as much as possible.

Take out a mortgage for more than the cost of the apartment

The bank cannot take risks by issuing money to customers without collateral. The only possible option is to look for loan options with or without a minimum down payment. Options to solve the problem:

an apartment in a building under construction from a developer when applying for a mortgage in a certain bank;
preferential mortgage programs with state support with a zero down payment;
subsidies from the state for certain categories of citizens to repay the down payment.

The options listed are not available to everyone. Therefore, it is better to calculate upcoming expenses in advance.

Determining the cost of an apartment

Its implementation is important, since the result will determine how much borrowed funds the bank will allocate - after all, the purpose of a mortgage loan is to purchase an apartment. Before understanding the definition of cost, it is worth noting that it varies. Thus, they distinguish inventory, investment, market, cadastral, consumer and other types of value, and depending on which of them we are talking about, the amount can vary significantly.

When approving a loan, the bank will proceed from the market value of the housing, since this amount will be encumbered, and if the borrower turns out to be insolvent and the apartment has to be sold, it is its market value that serves as a guide to the amount that can be raised.

Market value should mean the price that buyers will be willing to pay in market conditions; it is influenced by factors such as layout, area, communications, location of the property and others.

Let's look directly at how the market value is assessed - after all, it will not be enough to simply inform the bank about the price at which you found the property; you will need documents to confirm that it will be purchased at market value. The most important of them is an apartment appraisal report in the form of an album in A4 form, compiled by an appraisal company that has a special license and is accredited by the bank where you plan to take out a mortgage.

This report should provide information both about the condition of the apartment and the house in which it is located, as well as about the area where the house is located. Data on the recent sale prices of similar apartments is also analyzed, and information on other offers on the housing market is provided. Other information is also provided on the basis of which bank employees can decide whether to issue a mortgage.

On average, such a report costs approximately 4,000–7,000 rubles, and if the case is complex, the price may be higher. Complex cases include cases in which there are few objects for comparative analysis.

Typically, preparing the report becomes the buyer's task, although sometimes the parties to the transaction agree that the seller will handle it.

How does real estate valuation work for a bank?

There are several types of real estate values:

market;
cadastral;
evaluative;
inventory and so on.

For an apartment, a real buyer pays the market value of the property. The market price is fixed in the purchase and sale agreement and in the mortgage agreement. The cadastral value of the property is indicated in the BTI documents, and the appraiser calculates the estimated value for the bank. The amount that the buyer plans to receive for his property is not taken into account when approving the mortgage. What is important for the bank is the estimated value of the mortgaged property. In fact, the estimated value is close to the average market price of the property and consists of several components:

type and area of the object;
availability of repairs, redevelopment, quality of interior decoration, appearance of the facility;
location, transport accessibility, availability of developed infrastructure in the area;
state of engineering communications;
landscaping and appearance of the building where the apartment is located;
floor, view from the windows and other individual features of the object.

The cost of an independent real estate assessment starts from 3,000 rubles. These costs are traditionally borne by the buyer interested in obtaining a loan. A real estate appraisal for a bank is ordered from an appraisal company that has the appropriate accreditation. In this way, the bank is insured in case of manipulation of the real and desired price of mortgage real estate.

For the future buyer, the amount at which the purchased apartment will be valued is of great importance. If the seller set a price of 2 million rubles, and the appraiser valued the property at 1.5 million, the bank will not provide a sufficient loan to purchase the property. In such a situation, the buyer has two options - try to reduce the price and negotiate with the seller, or look for another object within the given amount.

Cases of overpricing

Issuing a loan based on the market value of housing gives rise to one important consequence - some borrowers seek to inflate it in order to obtain a mortgage for a larger amount. This may allow you to bypass the down payment requirement.

At first glance, everything is simple: you just need to enter a higher amount into the contract than what will actually be paid, because you cannot control how much is paid. Previously, this practice was indeed widespread, but then banks began to require an assessment confirming the cost of the apartment, which means it became more difficult to inflate it.

The only way to achieve this is to reach an agreement with representatives of the company conducting the assessment and distort the real data, but there are also many pitfalls here. Of course, this is not possible in all cases, because if the fraud is discovered, the company will suffer serious reputational losses, and may even lose bank accreditation, or even get into trouble with the law. Nevertheless, most often there are loopholes, and often it turns out that there is no need to distort information about housing; it is enough to just “correctly” calculate the result and change the assessment in the right direction.

It is also difficult to reach an agreement because of the banks, because they are well aware of the practice of inflating prices for mortgages, and therefore offer clients to make an assessment in those companies that are accredited with them. If the choice is made in favor of another, more accommodating one, this may cause distrust. Typically, the bank checks the assessment and, if its results are questionable, either greatly reduces the amount or refuses it altogether. Accredited appraisers value their accreditation, and therefore it is more difficult to negotiate with them.

In addition to the appraisers, you also need to come to an agreement with the seller: this is usually done through an advance agreement. The parties, having agreed that the contract will indicate an inflated price, then pull off a simple trick: the overstated amount appears in the advance agreement as an advance.

Down payment and collateral: why are they necessary for the bank

Registration of a collateral encumbrance on a mortgaged property is the cornerstone of a mortgage. There is a misconception that the bank owns the property until the loan is repaid in full. This is not true: the borrower is the owner of the property. The bank imposes an encumbrance that will not allow the owner to sell, donate or exchange the collateral without the knowledge of the creditor. When the mortgage is paid off, the borrower collects the necessary documents and goes to Rosreestr to remove the collateral with the consent of the lender. If the encumbrance is not removed after repayment of the loan, any real estate transaction will be disrupted.

The down payment is also an important part of the mortgage system. Banks rarely offer home loans to clients without initial investment. The reason is simple: if the borrower, by coincidence, is unable to pay the debt, the bank will have to sell the mortgaged home in order to get its money back. The process of selling mortgaged housing itself is quite complicated. The apartment is put up for auction, and the bank does not always manage to sell the property at a profit or at least for zero. Therefore, the borrower must provide the lender with a down payment to compensate for possible losses.

Interesting facts about down payment:

The starting down payment threshold starts from 10%. But getting a mortgage will be much easier if you have 20% or more of the home's value in cash. According to the recommendations of the Central Bank, in 2019, borrowers with a low starting investment threshold are subject to increased scrutiny, and the chances of loan approval are reduced;
Most banks do not accept maternity capital as a down payment. Firstly, from the moment of submitting an application for the transfer of funds from the maternal certificate to a mortgage account at the bank, at least 1 month and 10 days, or even more, pass. Second, when it comes to family mortgages, potential borrowers not having cash savings is a bad sign for a lender. There is a high probability that during the first crisis situation the family will become a debtor, and banks do not like this. Even the state mortgage program at 6% does not allow using maternity capital to pay the down payment;
If you don’t have money for a down payment, you can take out a consumer loan. Some banks specifically provide such a service as a consumer loan for the down payment on a mortgage. However, it must be taken into account that the borrower’s income must be sufficient to repay all loan obligations.

Main reasons

Most often, buyers who do not have the funds for a down payment resort to overpricing.

In this way, they bypass this requirement of the bank - this is precisely the main reason; in fact, every borrower who agrees to inflate the value of real estate does this precisely in order not to deposit his funds into the bank.

But there are also those who initially do not intend to pay and intend to pull off some kind of scam - the real scammers. However, they are in the minority, since everything in the mortgage industry is highly regulated, and they certainly will not be able to sell the apartment and make a really big profit.

Finally, it can be used to pay down as large a down payment as possible and thereby get the best mortgage terms - after all, banks tend to give lower interest rates to those who have made a large down payment compared to those who didn’t do it or contributed little money.

Purpose of overvaluation

Most often, borrowers ask to fictitiously inflate the cost of the home they are purchasing in order to circumvent the need for a down payment, which they may not have, or the available amount is insufficient.

The scheme for bypassing the first payment is quite simple. The seller indicates in the contract and real estate appraisal that the amount of housing is inflated by as much as the down payment should be. And he states in the documents that it was a deposit, which in the event of termination of the transaction by the buyer remains with the seller.

The bank counts this amount as a down payment and transfers the remaining amount to the seller. This way, the seller gets exactly what he originally asked for his property without raising the price, and the buyer gets a mortgage without paying a down payment.

The fact of transfer of the deposit is usually recorded by a receipt or an advance agreement, depending on what type of transfer of money this transaction is. However, this is a fundamental point, since there are different types of risks here.

The procedure of inflating the price itself is quite common and does not visually pose any special risks for the seller, since if a fictitious transfer of collateral is indicated, he should not return this amount back if the transaction does not take place due to the fault of the buyer. But here you need to be very careful about the name of the transferred amount. Since the advance in the event of a failed transaction is subject to return in full, unless otherwise specified in the agreement. Therefore, in the absence of special conditions, the seller risks owing a good amount of money to the failed buyer.

Risks and possible consequences

The described scheme is not legal, which means that when resorting to it, all parties must be well aware that there is a danger and they are taking risks. The buyer should weigh everything again before taking such a step, because:

if the income is not stable, and he fails to make payments on time, then there is every chance of being left without real estate, and also under investigation;
Without a trusting relationship with the seller, you definitely shouldn’t try to play with fire;
if the appraisal company does not find a sufficient number of similar objects with approximately the same price for the report, then, most likely, it will refuse to inflate its value.

Let's look at the consequences if the overstatement is revealed:

It is clear that there will no longer be any talk of any mortgage loan.
If the advance agreement and receipt are not drawn up correctly, the buyer may subsequently demand payment for them, and it is unlikely that it will be possible to prove that they have already been made.
This act is fraud and threatens problems with the law - of course, this is an extreme case, but you can be investigated under paragraph 1 of Article 159 of the Criminal Code, which is fraught with a fine of up to 120,000 rubles or in the amount of income for the year, or compulsory or correctional labor - and so on, up to imprisonment for up to 2 years.
And even if everything goes without problems, you will have to pay interest on the mortgage for the amount for which it was ultimately taken out - that is, if the price of the apartment is inflated, the overpayment will be higher.
Another problem may arise with applying for a deduction: during an audit, the fact of deception may be revealed, as a result of which the borrower will be held accountable, so one cannot count on receiving it.

When should you not overestimate the amount?

Of course, this scheme is not legal, since the transaction indicates a fake amount, so both parties must understand all the risks they are taking. And only after fully assessing the whole situation can you agree to this adventure. First of all, the buyer is at risk, so he must consider this situation from the following angles:

if he is not able to accumulate the required amount for a down payment in the near future, is his income so stable and high that he can repay the mortgage on time without any problems;
how strong is the trust in the seller , what will happen if he wants to deceive;
Are you sure that the appraisal company will agree to this overstatement?

The seller is least exposed to risks in this case, but certain circumstances can also jeopardize the deal. The main danger here lies in incorrectly drawn up receipts, since upon receiving an advance and terminating the transaction on his own initiative, the seller will have to return the advance.

The second unpleasant point may be an income tax of 13%, which will have to be paid if the apartment is sold earlier than 5 years from the date of its purchase. In some cases, owners are exempt from paying taxes after 3 years of ownership. But in any case, it is necessary to take into account the difference in the purchase price and further sale, if the specified number of years has not passed.

The buyer bears higher risks, so before offering such an adventure to the seller, it is worth remembering that this offense may be classified as fraud, and in this case you will have to answer before the law. Troubles may also arise with the seller who decides to profit, takes advantage of the situation and changes the terms of purchase and sale in his favor.

You can learn more about this from the video presented.

Procedure for purchasing an apartment

Despite all the problems and risks described, sometimes by inflating the cost it is actually possible to buy real estate with a mortgage. The main reason for this is the high range of prices, which makes it difficult to say unambiguously whether there is an overstatement in a particular case or not.

If the buyer nevertheless decides to resort to this trick and inflate the cost of the purchased home when obtaining a mortgage, then the scheme of action will be as follows:

An apartment is being selected.
An agreement is reached with the seller, because he will also bear risks due to participation in inflating the value of real estate. He will be required to provide a receipt indicating that he has been provided with the down payment amount. Let’s assume that the apartment costs 3 million rubles, and in order to make a down payment of 25% it is necessary for the bank to consider the apartment worth 3.75 million - then an advance agreement is drawn up for 750,000 rubles, and the seller issues a receipt for this amount, indicating that it was accepted as an advance. To eliminate the possibility of deception on the part of the buyer and subsequent demand for money on a receipt, he also gives a receipt for the same amount, stating that he borrowed it.
Next, you need to agree with representatives of the company conducting the appraisal so that they value the purchased property at 3.75 million rubles, that is, higher than its real market value. This stage is often the most difficult, since the assessment is carried out by organizations with which the bank cooperates, and it is not so easy to come to an agreement with them.
After the documents are ready, the buyer takes them to the bank: with the help of a receipt, he confirms the payment of the required amount, and with the help of an appraisal report, he confirms that the apartment is worth the money. You will also need a purchase and sale agreement, which states that the property is being purchased for 3.75 million.
If the documents pass the check, the bank will approve a loan for the remaining 3 million, which is believed to be 75% of the cost of the apartment, but in fact is its full cost. The documents you will need are an appraisal report, an advance agreement, a seller’s receipt and a draft contract.

Is it possible to inflate or decrease the value of real estate to obtain a loan?

When completing a transaction when buying an apartment with a mortgage, both the seller and the buyer may seek to change the price of the property in order to obtain benefits .

If in the purchase and sale agreement the price is indicated significantly lower or higher than the market price of housing, then this indicates an underestimation or overestimation.

Responsibility

In case of underestimation, the tax office can prove the fact of tax evasion. In this case, the seller will have to pay a fine in addition to the tax. Its size is determined by Article 122 of the Tax Code of the Russian Federation. For underestimation of tax or its erroneous calculation, the fine is 20% of the unpaid amount.

If it is proven that the action was intentional, then 40% of the amount. In addition, the tax office has the right to hold people accountable for tax evasion (Article 198 of the Criminal Code of the Russian Federation).

If the cost of an apartment is inflated, both the seller and the buyer face criminal liability for fraud in the field of lending (Article 159.1 of the Criminal Code of the Russian Federation).

Why use such a scheme?

Although inflating the cost of housing is a fraudulent scheme, if the result is positive, the buyer can achieve short-term benefits. The reasons why buyers resort to overestimation are:

The buyer does not have the funds to pay the down payment to the bank. One way to solve this problem is to inflate the cost of an apartment with a mortgage. The price is fictitiously inflated, and the bank issues a larger loan without an advance.
The property is sold without renovation. The buyer cannot immediately move in and live, and there is no extra money to put the apartment in order. In this case, the buyer may also resort to overestimation.
The buyer needs cash. It can be absolutely any need - buying a car, a wedding, a trip. Taking out both a mortgage and a consumer loan at the same time is unprofitable.

Sellers want to sell their home at a reduced price for the following reasons:

When selling housing that meets certain criteria, the seller, by understating its price, can save on paying personal income tax. The criteria include:
has been in possession for no more than 3 years;
The period of ownership is no more than 5 years for housing purchased after 01/01/2016.
In case of litigation. One of the former spouses may underestimate the value of real estate under an agreement in order to reduce payments when dividing property.

Seller's risks

Give more than you receive

For some reason, the apartment purchase and sale transaction was declared invalid. The seller receives his property back, and in return the money received from its sale is returned to him.

If the transaction was concluded with an inflated cost of housing, then the seller will be obliged to give the buyer not the amount that he actually received, but precisely the amount specified in the purchase and sale agreement.

You will waste time if the buyer is refused a mortgage

It often happens that the bank gives a loan in the amount of 80-90% of the market value indicated in the appraisal report. That is, in order to receive the full amount, you will have to negotiate with the appraisers. Appraisers accredited by the bank will not do this.

Or the bank may not approve the mortgage at all. In any case, the seller must patiently wait for the result of negotiations between the borrower and the lender, because the parties to the transaction have already signed a preliminary purchase and sale agreement.

Become an accomplice to fraud

Selling an apartment at an inflated price is essentially defrauding the bank. By participating in such a transaction, one cannot remain uninvolved in a fraudulent scheme. The seller of real estate, just like the buyer, is responsible before the law.

And the law states that you cannot provide knowingly false information to the bank. If the lender discovers a violation, both parties to the transaction will have to pay a large fine. Moreover, the seller and buyer can receive a real term.

Pay more taxes

The amount of home sales tax depends on how many years the seller has owned the property. If this period is less than 3 or 5 years, then you will have to pay personal income tax of 13%, taking into account the amount that was specified in the purchase and sale agreement.

That is, the seller will pay tax on money that he did not actually receive. The buyer, on the contrary, will save money, as he will be able to return 13% of this amount after registering ownership of the apartment.

Buyer's risks

They will refuse a mortgage and blacklist you

Fraud in documents by inflating the cost of an apartment can be detected even at the stage of reviewing the debt agreement at the bank. Financial and credit organization specialists have experience in such matters.

For example, bank employees will be able to detect false data when comparing the cadastral and market values of real estate. In this case, the borrower will not only be denied a loan, but will also be blacklisted.

The seller will not give back the overstated amount

The entire amount under the housing purchase and sale agreement with a mortgage is transferred by the bank to the seller’s account. Including the amount by which the value of the property was inflated.

An unscrupulous seller may not return the “extra” money. In this case, the buyer will not prove in any way that the seller owes him any money.

Criminal liability for fraud

The borrower may find himself in a situation where mortgage payments become unaffordable. Sooner or later, the bank initiates loan repayment.

Then the fact that the borrower provided deliberately false documents will inevitably be revealed. For such violations, the borrower will face punishment up to and including the opening of a criminal case.

Revealing false information when submitting documents to the bank threatens the borrower with legal action.

Online mortgage calculation

If you intend to buy an apartment or any other real estate on credit, it would be useful to calculate the monthly mortgage payment in advance. Knowing the possible amount of monthly payments, a potential borrower can easily calculate the maximum mortgage size, overpayment and loan term.

To accurately calculate mortgage payments, it is very convenient to use a special program that is available to everyone - a mortgage calculator. This program, which contains a set of mathematical formulas, is used to calculate all relevant loan indicators. The most important function of the program is online mortgage calculation. Using the calculator, the borrower can easily calculate all the key terms of the mortgage: payments, mortgage amount, overpayment, terms and others.

In order for the result of the mortgage calculation made on the calculator to be accurate, it is necessary to take into account such parameters as the interest rate, various fees and commissions that may occur, as well as the amount of the down payment available to the borrower. Therefore, it would be a good idea to check with the bank about the interest rate and fees for the selected loan program.

A mortgage calculator can easily be found online. Today, most banks post a similar program on their official websites. These services on bank websites help calculate the mortgage and the loan terms that are relevant for each specific borrower - individual interest rate, payments, etc. Such services usually already take into account the category of the borrower, the type of housing being purchased, the possibility of connecting to an insurance program or refusing it, suitable loan program. There are online calculators that calculate the size of a mortgage, posted not only on bank websites, but also on other Internet portals specializing in such services. Such calculators will also easily calculate loan terms according to parameters specified by the user. Online calculators give borrowers an excellent opportunity to pre-calculate all the parameters they are interested in without visiting the bank in person.

However, do not forget that the result of the calculation obtained on services located on third-party sites will not be final. To receive professional advice and accurately calculate a real estate mortgage, you can contact the manager directly at the bank. The mortgage calculator is a convenient service that allows those who are planning to purchase a home on credit to pre-assess their capabilities in order to understand the degree of long-term credit burden.