USEFUL INFORMATION
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J. Randolph Given
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PROBLEMS WITH CASH FROM SELLERS BACK TO BUYERS |
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There is no inherent problem with the concept of the Seller giving
credit back to the Buyer in a residential real estate transaction. There
are circumstances under which a Buyer may receive value from the Seller
without committing bank fraud. Unfortunately, over the past year or
two, many real estate brokers have prepared contracts in which I have
seen real issues of fraud. Let me offer some basic suggestions that
might help you protect yourself in a real estate purchase
from loss your deal at best, and criminal liability at worst. Sellers may pay closing costs of a Buyer. As I understand, Buyers with less than ten percent down usually can receive credits of 2-3 percent of the purchase price. I understand that Buyers with more down payment can often receive up to 6 percent of the purchase price in closing costs. Individual lenders may have their own underwriting rules about these Seller incentives. Before a Buyer gets involved in a contract providing for these payments, a Buyer should check with his lender. He or she should be sure that the loan can be approved with the incentives included. To the extent that Seller incentives can be a problem, it usually involves an effort to circumvent the loan-to-value ratio ("LTV") maximum of the lender by inflating the value of the property. This allows the Buyer to borrow more money than a fully informed mortgage lender would be willing to loan on the deal. In other words, the Buyer is not putting enough money of his own into the deal. RETURN TO: Useful News Index RETURN TO: Web Site COPYRIGHT 2007 |
Buyers can avoid trouble by taking two precautions.
First, the purchase contract should clearly show the incentive.
The mortgage lender must receive a copy of it.
Second, all of the credits should be shown on the HUD-1 Settlement
Statement, so as not to violate the Real Estate Settlement Procedures
Act. My two warning indicators of a dirty deal are: (1) a side deal
that allows the credit or payments to the Buyer without it being
incorporated into the real estate sales contract, and (2) provision
that the value being transferred to the Buyer by the Seller must be
in the form of cash rather than a fully-disclosed credit. The secret side deal is often fradulent, if any significant sum of money is involved. Value in the form of cash to the Buyer from the Seller is suspcious. Most lenders do not want to see cash to the Buyer for good reason. Many lenders in the market offer 100 percent mortgages. If a Buyer needs to take actual cash from the closing, perhaps he or she can not qualify for one of those 100 percent loans. I always want an explanation from the Buyer. In the best case scenario, the parties risk having their deal fall apart, because they have contracted for an incentive that is too great for the lender to approve. The mortgage finance contingency will not be fulfilled and the collapse of the deal is inevitable. This wastes everyone's time and resources. Here is a thought for Buyers in the market. Do not be too quick to trust a real estate broker who wants to draft a contract with money coming back to you from the Seller in an amount that exceeds the standards mentioned above. While most brokers are competent and honest there are exceptions. If the suggestion comes from your loan officer, please be even more cautious. Most loan officer are also competent and honest, however my experience tells me not to assume either. Their industry has more than its fair share of rascals. Make a special effort to find a loan officer whom you can trust. A referral from your attorney or from someone who has earned your trust is always a good idea. NOTHING CONTAINED IN THIS ARTICLE IS LEGAL ADVICE: IMPORTANT DISCLAIMER |