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.

Which banks operate under the scheme of inflating the value of real estate?

Today there are a lot of banks on the Russian market, so they operate in conditions of fierce competition and struggle for every client. Such conditions have led to the emergence of banks that are loyal to overvalued transactions.

Such financial institutions include:

Sberbank.
Raiffeisen Bank.
VTB.
Promsvyazbank.
Rosselkhoz.
AK Bars.
Russian capital.
Opening.
Transcapitalbank.
Metallinvestbank.

Expert opinion

Alexander Nikolaevich Grigoriev

Mortgage expert with 10 years of experience. He is the head of the mortgage department in a large bank, with more than 500 successfully approved mortgage loans.

It is important to understand that even if you decide to contact one of these banks and carry out an overpriced transaction, the deviation from the real market price should not be more than 20%. Anything more is too suspicious and it’s unlikely that anything other than refusal awaits you.

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.

Apply for a mortgage with maternity capital without assessing all the risks

Maternity capital can be used as a down payment on a mortgage or to repay the principal and interest on a mortgage loan. The hero of our article, Alexander from St. Petersburg, used the second option - with the help of maternity capital, he repaid part of the housing loan. And I regretted it.

Why is this an error

Alexander faced three problems.

Problems with refinancing.

Refinancing involves full repayment of the loan from the first bank. If maternity capital was used to purchase housing, then within six months after this transaction the owner of the apartment is obliged to allocate shares in the apartment to the child (or children). Then the new lender will receive an apartment with the children’s shares as collateral - banks are reluctant to get involved with such objects. The hero of our text, for example, never managed to refinance his loan.

Division of a mortgage apartment after divorce

When using maternity capital, not only children, but also both parents become applicants for shares in the apartment. Dividing property can be a complex and lengthy process, especially if the divorce does not go smoothly. And even a marriage contract will not be able to cancel the legal requirements for allocating shares to children in an apartment if it was purchased with the help of maternity capital.

Selling an apartment

To sell an apartment with maternity capital, two conditions must be met:

1) allocate shares to children in other real estate, the area of which is no less than the current one;

2) obtain the consent of the guardianship authorities.

In addition, the law on maternal capital states that shares are allocated for all children, including subsequent ones. Even if one of the parents (or both) has children in another family, this can become an additional problem.

Not comparing mortgage rates is also a mistake
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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.

Cadastral and market value: what is the difference?

Any property has 2 prices:

Cadastral.
Market.

The market price is the real, objective cost of the apartment. It depends on renovation, location, infrastructure, etc. This figure is also influenced by the general state of the real estate market and the competitiveness of housing: the first floor is cheaper than the rest, and other similar “rules”.

Cadastral price is the amount that is used to calculate property taxes. It is always below the market price. What is beneficial for the owner is that he pays less taxes. The cadastral value depends on the region where the housing is located. Each region has a certain coefficient that is used to calculate the price per square meter.

When obtaining a loan to purchase an apartment, it is important to know exactly its market value. It is she who is being overestimated.

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.

How to reduce risks?

The easiest way to reduce risks is to avoid agreeing to dubious schemes. Neither the buyer nor the seller knows what is in the other's head. Maybe the seller was initially looking for a buyer who needed to close the deal at an inflated price in order to profit from it. Or maybe it's quite the opposite. Unfortunately, no matter how the situation turns out, it will be difficult for the law to protect someone who signed the papers in their right mind and sober memory.

It is very important to try to protect yourself from unfavorable situations. And one of the options for such protection is a safe deposit box. There you can not only leave funds until you take ownership, but also freeze the money until all the terms of the contract are met.

Another option to reduce risks is to carry out all transactions only by bank transfer. After all, the transfer of funds from the buyer’s current account to the seller’s account is direct evidence that exactly the same amount was paid/received.

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.

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.

Don't have an airbag

A safety net is money for “safety net”, a reserve fund that should ideally cover 3-6 months of your monthly expenses (this also includes expenses on your mortgage loan). Such a cushion must be constantly available - it cannot be kept in securities, spent or loaned out. The best place for an emergency fund is a deposit or savings account.

Why is this an error

If a person does not have a safety net, then, having lost income - for example, due to dismissal or illness - he will not be able to pay his loans. There will be fines and penalties, this will lead to a significant overpayment and a damaged credit history, explains Ekaterina Golubeva. And if the borrower does not make payments for a long time, he may lose the apartment, which is pledged to the bank.

Some borrowers who have temporarily lost their income and are left without a safety net can take out an additional loan or use a credit card. This is a trap that further aggravates the situation, says the financial consultant.

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.

Buyer's risks when the mortgage is overstated

Taking out a mortgage on an apartment without investing any of your own funds into it is profitable and convenient. But remember that a scheme to inflate the cost of an object is illegal. This means that it has its own quite significant risks. Both sides take risks, but now let’s talk about what risks the buyer bears.

Risk 1. They will refuse a mortgage and blacklist you

Do not think that financial institutions are not aware of such fraud. When studying documents, bank specialists will definitely pay attention to the significant difference between the cadastral and market values.

Expert opinion

Alexander Nikolaevich Grigoriev

Mortgage expert with 10 years of experience. He is the head of the mortgage department in a large bank, with more than 500 successfully approved mortgage loans.

The mildest punishment that awaits the buyer is refusal of a loan. Then the buyer is blacklisted. Do not forget that banks transmit information about unscrupulous borrowers to the Credit Bureau, and in the future you will not be able to take out a loan from this or any other financial institution.

Risk 2. The seller will not return the overstated amount.

The bank transfers the entire value of the property to the seller. He, in turn, must give a certain part to the buyer. In this regard, situations may arise when the apartment owner simply refuses to do this. Therefore, it is necessary to draw up a receipt for the refundable amount. She won’t go to the bank, but she will protect the buyer.