Instant Equity buying far below appraised vaue

[Ryan K.]

I'm looking to buy  a home that appraised 1 year ago for 100K. The seller owes 65K on the mortgage. I want to get a conventional mortgage for the 65K, and wipe out the sellers mortgage. If I did this, would I have instant equity in the property? 

Then I plan privately draw up paperwork with the seller and RE attorney for the remaining amount (we've privately discussed the actual amount, (90K), so I don't have to get a higher mortgage. 

If I follow this plan, would I have instant equity, or would the bank not allow that? Also, would the bank allow me to buy a home so far below the appraised value?

[Kyle J.]

Sounds like you'd owe $90k either way, so I don't understand the plan.  Either you tell the bank you're buying the property for $90k and get a mortgage based off that amount, or you tell the bank you're buying the property for $65k and get a mortgage based off that amount and then have the seller carry a second for $25k ($65k + $25k still equals $90k). 

I know you said the seller would offer more favorable terms on the $25k, but it's hard to imagine he's going to offer more favorable terms than a 30 year fixed rate you can get on a primary mortgage. 

You didn't mention this, but I'll point it out anyway, if you were hoping that by telling the bank you were going to be buying a $100k house for only $65k that they would finance 100% of that, I can tell you that won't happen. Banks use either the purchase price or the appraised value, whichever of the two is LOWER, to determine LTV. So you'll still have to come up with a down payment. Just FYI.