An underfunded mortgage involves understating the value of the property in the purchase and sale agreement. The signing of the package of documents must be accompanied by an experienced lawyer. From our article you will learn the main risks of underfinancing and under what conditions it makes sense to consider the option in principle. Where does the benefit for each party begin to justify the risk?
How does a mortgage transaction with underfunding work?
A mortgage transaction with underfinancing involves dividing the total price of the property into two parts:
- price of the property;
- the price of inseparable improvements.
At the same time, the down payment can be specified both in the first agreement and in the second. Only Sberbank agrees to underfunded mortgages.
A purchase and sale agreement and an agreement for inseparable improvements to the apartment are concluded between the seller and the buyer. Only purchase and sale transactions are submitted to government agencies for registration.
Important! If part of the mortgage is indicated in the contract of inseparable improvements, then the transaction will take place in two stages and the seller will receive the credit money only after the second stage:
1.first, the Buyer’s right to real estate and a pledge in favor of the bank are registered (an application is submitted from the Seller and the Buyer, registration period is 9 days through the MFC),
2. then the bank’s First Lien is removed according to the letter (carefully read the letter itself, where the bank asks to pay off the mortgage registration record - the record number must be the Mortgage). And a new pledge is registered on the basis of the Mortgage and Mortgage Agreement (the application is submitted together with a bank representative by proxy).
The attitude of banks towards such registration varies, from a categorical refusal to finance a dubious scheme to a loyal one.
Recommended article: VTB mortgage terms - to help the borrower
Risks
Understating the value of an apartment in a purchase and sale agreement with a mortgage affects the interests of the parties to varying degrees:
| Side | Advantages | Risks, disadvantages |
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| Salesman |
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| Buyer |
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| Bank |
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| State |
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Risks are often reduced when concluding a transaction between close people with common interests or relatives.
When is it better not to overestimate?
- Do not inflate the cost of an apartment if you do not have a stable income. If you repeatedly delay payments, you can not only be left without an apartment, but also find yourself under investigation.
- In addition, it is dangerous to inflate the price of expensive real estate: in the absence of competitive comparisons, the appraisal company is unlikely to recognize the obviously inflated value.
- Refuse to inflate the price of an apartment if you are not sure that the seller will not pass on information about your agreements to third parties. One of them may be a bank.
It is worth recalling that inflating the cost of an apartment with a mortgage is an illegal scheme. Therefore, both parties to the transaction must understand what risks may arise as a result of such an arrangement.
To what level can the price be reduced?
The greater the difference between the amounts of loan agreements and purchase and sale agreements, the higher the risks described. In case of a significant understatement, government agencies may initiate an audit. Then you will need to justify all amounts.
You can prove that, for example, major repairs were made to the purchased apartment by agreement with the seller. The presented documents from the construction and repair company will clearly testify in your favor that you actually improved the conditions and did not just evade paying taxes. Will the repair team issue such certificates... After all, then they must pay the tax.
Recommended article: How to pay a mortgage through Sberbank online - step-by-step instructions
The number of nuances in an underfinanced transaction causes a lot of controversy and different points of view among experienced lawyers and judges. There is no exact level to which the contract price can be reduced. When deciding whether to benefit yourself, consider the following legal requirements:
- the price of the property in the contract should not differ significantly from the market price indicated by the expert in the assessment report;
- the minimum value of the premises, which is taken into account for calculating the tax, is 70% of the cadastral value;
- Personal income tax is paid by the seller;
- the amount in the purchase and sale agreement will affect the buyer’s tax liability if he decides to sell the property in the next 5 years; then he will become a seller and will choose between:
- underpricing associated with all risks;
- waiting for the expiration of 5 years;
- payment of tax, which is calculated “Sale price minus purchase price”, that is, the cheaper you bought, the more tax you paid for a “transparent” sale in the future.
How much is the price of an apartment being inflated?
The mortgage loan amount is the cost of an apartment, house or other residential property. It is worth considering that there are several types of housing costs.
Types of real estate values:
- market value - the price that is set on the market in a certain period of time;
- investment value - the price that a potential buyer is willing to pay for a specific property; ;
- liquidation value - the price that the seller is willing to accept in the event of an urgent sale of the apartment;
- cadastral value - the price established during the state assessment. Used when calculating taxes.
In our case, cadastral and market values are relevant. When the price of a mortgaged apartment is inflated, the market value appears, since banks also rely on the market when calculating the size of the mortgage loan.
The cadastral value is determined by specialists from regional branches of Rosreestr or licensed appraisers. When calculating the cadastre, special formulas and coefficients are used that are established for each region of the Russian Federation.
Usually the cadastral value is lower than the market value, but the opposite situation also happens. The apartment tax is calculated according to the cadastral value; the higher the cadastral value, the higher the tax.
This happens because government appraisers do not go to the site and inspect the apartment. Their assessment may not take into account a number of important characteristics: the condition of the property, its distance from the road, etc. This leads to errors.
Should I agree?
For the buyer, all other things being equal, a mortgage with underfunding is significantly inferior to a traditional one. The seller's interest is 13% of the amount exceeding the previous purchase price. Possible bonuses that partially compensate for the buyer’s risks:
- the discount covers the difference in the interest rate on the loan, insurance premiums, compensates for risks (interest and insurance can be calculated on a calculator; the acceptability of being subject to criminal liability requires a subjective assessment; the likelihood of getting caught is individual for each case);
- purchasing an exclusive property that is beyond our means on completely transparent terms;
- inclusion of actual repairs in the mortgage amount.
How to reduce risks
When agreeing, take all available measures to reduce the risks associated with the recognition of the contract as invalid. Make sure there is no:
- bankruptcy procedures - website of the Federal Register of Bankruptcy (bankrot.fedresurs.ru/DebtorsSearch.aspx?Name=);
- validity of sellers’ passport (services.fms.gov.ru/info-service.htm)
- real estate encumbrances – extract from the Unified State Register of Real Estate;
- overdue debt to banks - credit history;
- unfulfilled monetary obligations - on the bailiffs website (fssprus.ru/iss/ip/);
- objections to sell the premises if there is a spouse, more than one owner.
Recommended article: How to get a tax deduction for an apartment for a pensioner
The article Sales and purchase agreement with a mortgage - important points for the seller and buyer describes specific ways to reduce risks.
Use non-cash payments. In case of future disagreements, it will be easier for you to confirm the calculations. In addition to traditional transfers, banks offer special services.
Transferring money for a mortgage with Sberbank is possible through the Letter of Credit service. The buyer deposits funds into the account, the buyer receives them by presenting a document confirming the fulfillment of the obligation to register the transfer of rights. For 2,000 rubles, the bank guarantees the fulfillment of obligations by both parties and performs the transfer without additional fees.
Answers to readers' questions
Question: Hello! If the transaction when buying an apartment with a mortgage (secondary) is with a lower price and there is an additional agreement (for the amount of cash), on what amount can I receive tax? General or only with the one in the purchase and sale agreement?
Answer: Hello, a tax deduction can be obtained from a purchase and sale agreement. An additional agreement is not provided to the tax office. It’s not just that the amount is divided into two contracts.
You can apply for the deduction amount that you currently do not receive from your purchase when purchasing your next property. How to get a tax deduction when buying a second apartment is described in another article.
The attitude of banks towards such mortgage transactions
In order to complete a transaction with an understatement, you must select a credit institution that would agree to participate in this. Several years ago, banks categorically refused; at the moment, many still adhere to the same position. Nevertheless, you can find banks that will agree to accommodate the client halfway, however, there are certain nuances.
All banks can be divided into four categories in relation to undervaluation transactions:
- Banks that agree to apply such schemes without restrictions and additional penalties are Ak Bars, Vneshtorgbank, Moskommertsbank.
- Banks that agree, but have their own conditions. This may be an understatement only up to the loan amount, or an individual consideration taking into account the situation of a particular borrower and the amount of understatement. These include Sberbank, VTB 24, Rosbank.
- Banks that carefully hide their participation in such schemes, but under certain conditions can offer their clients a solution to the problem. For example, Deltacredit, Raiffeisenbank.
- Banks that categorically refuse – Absolut Bank, SKB.
It is unlikely that an understatement will be processed without notifying the bank and its assistance , since any bank has its own appraisers.
When the value is overstated, as opposed to understated, the buyer, on the contrary, seeks to reach an agreement with the seller and the appraiser without informing the bank. However, banks have now tightened their control over appraisers. Some banks themselves order an apartment appraisal in order to be aware of its real value, for example, VTB 24.
The overpriced scheme can be used not only when purchasing an apartment on the secondary market, but also in new buildings from the developer. In this case, two contracts are filled out. One is between the developer and the borrower and the other is between the borrower and the bank. The developer confirms to the bank that the down payment has been paid, and the bank issues a loan. Subsequently, an additional agreement to the first agreement on changing the amount is signed. As a rule, banks are well aware of this scheme, but no official confirmation of this can be found.
Credit organizations also need clients and can actually issue a loan without a down payment in such situations, but everything is individual. A big role is played not so much by the choice of the bank itself, but by the specific borrower and the amount of overstatement.
- Maria Yurievna
:May 5, 2021 at 1:54 am
Dear readers, if you liked the article, share it on social networks. If you have any questions, ask them in the comments or in a special section on online mortgages.
Answer
- Alyona
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November 30, 2021 at 3:20 pm
Hello! I bought an apartment with an underfinanced mortgage. I had no down payment and my agent said anything was possible. We signed 2 contracts, there was a little hassle. because they bought it in another city. And only from your article I learned that it was bad. But I began to have doubts when, when accepting the apartment, the realtor from the seller’s side did not come, but asked me over the phone not to ever apply for a refund of mortgage interest and taxes. I said that I was not ready to discuss this issue now, gave her my phone number and we agreed that we would discuss this topic, but a month passed and she did not call me. Although, when signing the contracts, no one voiced the risks and could then have demanded, as I now understand, a discount. They owned it for a little over 3 years. As a result, the sellers sold the apartment at the same price as they bought from the developer, while they did nothing there, but received their deductions and an additional 430 thousand rubles. And now I’m afraid to file for a deduction, otherwise the deal will be declared invalid and criminal liability may still arise. For the bank there is a separate agreement for a larger amount, and for the MFC for a smaller amount. Tell me, please, what to do?
Answer
- Maria Yurievna Sokhan
:
April 2, 2021 at 5:21 am
Hello, of course you can apply for deductions based on the main purchase and sale agreement, which you submitted to the MFC.
What is the risk of understating the price of an apartment in the Sale and Purchase Agreement?
Many realtors, without delving into the legal intricacies, argue that for the Buyer the risk of an undervalued apartment in the Sales Agreement comes down to the following points:
- If the court recognizes the transaction as invalid, the Buyer will be able to claim only the amount specified in the agreement (including in the event of bankruptcy of the Seller);
- The buyer will not be able to receive a full tax deduction for the purchase of an apartment (to the extent of his actual costs).
Let's look at these risks in order.
Regarding the first point, this is not quite the case. If the court recognizes the transaction as invalid, then bilateral restitution is applied - that is, each party is returned everything that was received under the transaction. Therefore, in practice, to protect the Buyer from the risk of non-repayment of the entire amount, a regular receipt , which is also taken into account by the court, like the Apartment Sale and Purchase Agreement.
You can require the Seller to write one receipt confirming receipt of the full (real) amount for the sold apartment. Or you can draw up two receipts - one for the amount specified in the contract (the reduced price of the apartment), the other for the remaining amount (the difference between the real and the reduced price). This balance is presented as material security (guarantee) of the Seller in the event of termination of the Sale and Purchase Agreement or its recognition as invalid.
And such receipts provide real protection from the Buyer’s risk in the event that the contract indicates an underestimated cost of the apartment . Judicial practice confirms this, here is a specific example:
Excerpts from the ruling of the appellate court in gr. case No. 33-43371/17 dated 10/20/2017 (Moscow):
“...In addition, he explained that the plaintiffs purchased an apartment from the defendant for 5,700,000 rubles, the second receipt in the amount of 2,200,000 rubles, issued by (- by whom: full name of the defendant -), is security for the contract in the event of its termination or invalidation ...
...Receipts handwritten and issued (- from: full name of the defendant -) - (to: full name of the plaintiff -) dated 03/09/2016 confirm that according to one of them (- who: full name of the defendant -) received from (- whom: full name of the plaintiff -) a sum of money in the amount of RUB 5,700,000. for the sold three-room apartment..., in accordance with the apartment purchase and sale agreement dated 03/09/2016... According to the second - (- who: full name of the defendant -) received from (- who: full name of the plaintiff -) the sum of 2,200,000 rubles. and undertook, in the event that the purchase and sale agreement for the specified apartment is declared invalid or terminated in court on the basis of a court decision that has entered into legal force, to return (- to whom: full name of the plaintiff -) the specified sum of money 2,200,000 rubles. within 3 days...
The literal interpretation of the receipts presented by the plaintiffs allowed the court to conclude that (- who: full name of the defendant -) received on two receipts from (- who: full name of the plaintiff -) towards the cost of the apartment 5,700,000 rubles. and 2,200,000 rubles, and a total of 7,900,000 rubles.
... the court came to the correct conclusion that (- who: full name of the defendant -) had an obligation to return (- to whom: full name of the plaintiff -) 7,900,000 rubles paid by the latter (- to whom: full name of the defendant -) under the purchase agreement -sale of an apartment dated 03/09/2016, in return for the return of what was executed under an invalid transaction.”
Simply put, here the apartment was sold at a price reduced in the contract and the Buyer was given two receipts - one for 5.7 million rubles. (according to the contract price), the other - for 2.2 million rubles. (as security, “guarantee” of the Seller). And the court decided that, as a result of declaring the transaction invalid, the Seller must return both amounts to the Buyer on both receipts, despite the fact that only one amount appeared in the Sale and Purchase Agreement (the reduced price of the apartment).
Theoretically, of course, another court may make a different decision - that is, the risk for the Buyer still exists. However, here is a real example of how the receipt issued by the Seller of the apartment completely covered the Buyer’s risk associated with the undervalued contract price .
Deposit or advance payment - what form of advance payment is used in transactions for the purchase and sale of apartments? See the link in the Glossary.
Additional agreement to the contract with reduced value
In practice, the same realtors use different wording for the second receipt. The first is issued to receive the amount under the contract, and the second - for the so-called “inseparable improvements in the apartment” (repairs, built-in furniture, appliances, etc.). With this approach, lawyers advise drawing up an additional agreement to the contract , which describes in detail all these inseparable improvements and changes the clause of the contract in which the price is indicated (i.e., according to the additional agreement, the price of the apartment becomes higher).
In order not to mess things up, it is better to entrust the development of such an agreement and additional agreements to it to specialized lawyers.
Separately, it is worth mentioning the case when the court may invalidate a transaction at the request of the bankruptcy trustee in the bankruptcy of the apartment Seller . Here you need to keep in mind that such a risk may arise precisely in the case where the apartment was sold at a clearly reduced price (relative to the market). The court may see this as an attempt by the debtor to quickly sell his assets so that they are not foreclosed on by creditors.
But, firstly, bilateral restitution here also comes into force, and receipts can also be taken into account by the courts, and secondly, the Buyer here can also count on compensation from the state if he has the status of a bona fide Buyer (more on this – see the link in the Glossary). And thirdly, the Buyer has the opportunity to check the Seller for possible bankruptcy (we have such tools in the SERVICES section).
Additional expenses when buying an apartment - what threatens the Buyer?
As for the second point – regarding the Buyer’s incomplete receipt of a tax deduction in the event of purchasing an apartment at a price lowered in the contract – here, too, realtors do not agree on everything (and maybe they themselves don’t know).
Firstly, to justify the deduction, the tax office considers not only the Sale and Purchase Agreement, but also receipts issued by the Seller to the Buyer, and other payment documents (payments under a letter of credit, for example). The task here is to prove and confirm the actual amounts spent on the purchase of the apartment.
Secondly, a tax deduction for the purchase of housing is provided only within 2 million rubles. costs of the Buyer (for more details, see the Glossary at the link). And if the reduced price in the contract exceeds these 2 million rubles, then this means that the Buyer will already be able to receive his deduction to the maximum. In Moscow, for example, all apartments are sold at prices exceeding this threshold of 2 million rubles. (even taking into account the reduced cost).
Refund of the advance (deposit) for the apartment. Is it possible? The answer is in the note at the link.
So it turns out that the Buyer’s risks from understating the cost of the apartment in the Sale and Purchase Agreement are greatly exaggerated. True, there are some “financial inconveniences” for the Buyer from such price manipulation. These are the cases when it happens:
- buying an apartment with a reduced price with a mortgage ;
- subsequent sale of an apartment that was purchased at a price lower than the real one.
In the first case, the bank may not accept the reduced value and refuse the mortgage (for other reasons for refusal, see the link). Although some banks agree to this. But in such cases, the bank may tighten lending conditions - increase the level of the down payment and/or increase the loan rate.
In the second case, the Buyer will have to pay an increased sales tax if he sells the apartment within 3 years (and if this is not the only home he has, then within 5 years), since he will not be able to apply a tax deduction in the amount of real the cost of purchasing this apartment.
As a result, in general, both realtors and lawyers do not recommend that Buyers agree to lower prices in the contract , but at the same time they recognize that such transactions are common in the real estate market. And the same realtors and lawyers themselves participate in such transactions and advise their clients on how to competently protect themselves from this risk.
Discussions on this topic can be read on our FORUM here: “The seller wants to indicate an incomplete price of the apartment in the purchase and sale agreement.”
Distribution of tax deductions between spouses when purchasing an apartment - how does this happen?
