Keep Everything on the Table (and Avoid Jail)

It's not unusual in a real estate transaction to have the Sellers contribute toward the Buyer's closing costs. Buyers that are short on cash, but have the credit to get a mortgage often ask for this to help cover their out-of-pocket expenses. This is all fine and acceptable as long as it's DISCLOSED to all parties and APPROVED by the lender.

This means that all the transfers of monies related to a specific real estate transaction are listed on the HUD settlement statement at closing. This disclosure is important, mainly because the lender wants to make sure that the money being borrowed is actually paying for the property that secures the loan and not going to the buyer as cash under the table at closing.

Here's a real life example: I know of a situation where a lender (off the record, of course) told a buyer that in order to get some extra cash that she needed for repairs she could raise the sales price and then ask the seller to cut a personal check back to her outside of closing. At first, this may sound like a great idea, right? Why not? The seller gets their money, the buyer gets the house, the lender closes the deal. Here's why: IT'S FRAUD.

Mortgage fraud, actually, which makes it extremely odd that the lender would even suggest it 'off the record'. Lenders usually have a cap on how much can be contributed by the Seller- typically 3-4% of the sales price. If the buyer needs more cash for repairs, they can get a second home equity loan or get a second job, but they can't get it from the Seller outside of closing.

Cash-Back Schemes: The buyer and seller collude to deceive the lender as to the true sale price of a property. The seller gives the buyer a cash rebate which is not disclosed to the lender. As a result the lender lends too much, and the buyer and seller pocket the overage. This scheme usually requires appraisal fraud to deceive the lender. "Get Rich Quick" real-estate gurus' courses frequently rely heavily on this mechanism for profitability. (From Wikipedia)

Mortgage fraud is a federal crime and penalties can be quite severe. For me, I prefer to stay out of jail so don't call me if you're planning to try it!

Click here for a great article about if from Bankrate.com.

-Peter

www.NashvilleCityHomes.com
REALTOR. City Home Specialist.