Mortgage cash back question: Is this right?

Question

First some background:

A home we are looking at buying apraised for $340K a year and a half ago. It has sat empty in a high tax area since then, and friends are offering it to us for $250K. I've done the research with realtor friends and everyone agrees its a good deal. It needs about $20K of work (windows, ventilation). In researching ways to finance the mortgage and/or repairs, one of the places I've received quotes from suggested the buyer change the price from $250 to $275, then give me $20k back. Obviously a red flag or two went up here.

It doesn't seem the house would have any problem legitimately appraising for $275, but I'm concerned about the legality of this. Is this a legit solution to my financing issues?

Please only people with real knowledge or experience, not someone dropping a sarcastic comment looking to add more points to their name.

Thanks for the answers. How does a HELOC work in terms of the amount of equity you need to have in the property vs how much you borrow?

Answer 1

nn lo so..ciao ciao

Answer 2

In the US, it will depend on how savvy the buyer is. The buyer should get an appraisal and title insurance as well as a building inspection. Some people think they save money by skipping these things, but it's not a good idea. Without a mortgage, you should be able to close in 30 days or less. One of them should call a title company or lawyer, depending on what's done in that state, and ask them. If the buyer is cheap and/or dumb, the only thing that has to happen is a new warranty deed gets drawn to convey your sister's interest in the house to the buyer. Caveat emptor, in this case. The buyer should get an inspection and appraisal, and I hope for her sake she knows that, and buy a title policy which guarantees the chain of title, finds out what liens may be on the property, verifies easements, stuff like that. But this doesn't really mean anything to your sister if it's not done. The advantage to the seller is there's no contingency for a mortgage. A lender won't put the kibosh on the deal by saying, "No money for you!" Cash buyers do frequently offer less than others because they figure cash is still king. Maybe it is, but my impression is the contract is already accepted so it doesn't matter any more.

Answer 3

First of all, get the house appraised now. Depending where you are (really doesn;t matter much) the market has taken a severe downturn; hence the wonderful price offering. They need to unload it. No what they are advising is not legal...read on....

The best and legal way to do this is as follows:

1. Have an apprsaiser appraise the house - cost at the door anywhere between $250 and 750 depending where you live.

2. Get estimates in writing from licensed, legitimate contractors to make the repairs, including material and labor.

3. Submit your offer and all the pricing for repairs to the mortgage company.

The title or abstract company will hold the repair money in escrow and disburse to the contractors as the work is completed and approved by the lender and yourself.
THIS IS VERY IMPORTANT.

Do not do the cash back; it is not legitimate. It can be done and is a lot, but that doesn't make it legal. The sellers will still have to claim that money either on capital gains or re-invest. They will lose money. Plus it is sneaky and if a lender finds out you can be in trouble. Plus there will be a paper trail and
it would be considered income in the eyes of the IRS.

You need to look at better mortgage brokers. Read the fine print, have a qualified third party evaluate anything BEFORE you sign it. I would reccomend, if you were my client (as a mtg brkr) that you get an attorney......CYA......

Do not submit your personal info on line. These brokers and mtg companies will run your credit over and over and you will be on every telemarketing list out there. You can and almost always get your credit destroyed this way, plus remember identity theft.

Please run to a good real estate attorney and a local BANK.

Good luck.

P.S. In this market, I would not be surprised if your apprasial comes in closer to $250 than $340---not to scare you, but you need to be educated. I have been in the financial lending industry for too long. I have seen way too many people get taken.

Answer 4

A better solution to the problem is look into getting a 403K Loan on the property. This is a LEGAL program that I have personnally used when a house needed repairs. In your case you would buy the house for $250,000.00 and the BANK would hold $20,000.00 in their account until repairs are either started or finished depending on how you intend to pay for the repairs. Most contractors will want 50% upfront and the balance when the repairs are done. This 403K loan would allow you to fund the purchase and the repairs in one loan with one closing and NOT have to play game with taking cash back at closing.
The problem with getting cash at closing is that you are getting more out of the house then you have put into it and the bank is on the hook for a value higher then present condition and if you walk with the cash and do not do the repairs then the bank can't recoup it's investment in the property. By them holding the funds until the repairs are completed and inspected they can't overpay for the house, you can't walk with free money, and nobody takes a chance on going to jail for committing fraud.
Also remember that just because the house sold for XXX or appaises for XXX does NOT mean that it is a good deal or that you will make money on it. What if the values continue to fall in your area for the next 5 years? Maybe next year the house will "appaise" for $150K? What then? I would ONLY buy the house IF I either can rent it for more then my TOTAL costs AND make money of the cashflow OR move into it and use it as a primary personal residence where my monthly AFTER tax expenses would be less then I am currently paying.
I will sell you some Enron stock at 50% of it's highest "appraised" price if you think appraisels are a sure fire way to make money.

Answer 5

This has become a common undertaking in the mortgage market; however, it is very illegal and could potetially get you into a ton of trouble. The banks offer there own incentives that are simlar but completely legal. You can get a mortgage that will give you cash back up front; just ask your bank. This is very common. Also, you need to consider the affect of points on a mortgage which will be a back end cost. Further, instead of asking for cash back, it may be more beneficail to get a home equity line of credit--this may save you thousands in interest.

Answer 6

If you want disclose the cash back on the Settlement Statement, it isn't going to happen. The buyer can never walk away from the table with more cash than was put up as deposit. (Even if you could, $20k is greater than the max 6% contribution allowance permitted)

If you don't show it on the HUD-I...IT IS ILLEGAL!
(All aspects of the transaction must be disclosed to underwriting, else it is loan fraud)

You could make the repairs a condition of the contract, have them done before closing and have the seller pay for them (froom invoice(s) ) at the closing table.

Answer 7

Have you had it inspected yet?

When you make an offer, you can put that into the conditions of buying this house. We had our sellers pay for our closing costs, so while we paid $178K and it was priced at $175 (meaning we got it at $172), we were actually given $500 back at closing.

Basically it's up to you--talk to your loan officer about how this would change your loan amount and your monthly payments.

Another suggestion is to look at programs in your area--some programs offer to have it for you if you qualify.

Answer 8

The law varies from one state to another...if these items need repair it should be called out in the appraisal report (most lenders will request a detailed list applied to the report with cost of repairs). I would suggest that the seller put aside the $20k in an escrow account with your title company to be held until the repairs are done. If your perspective home will appraise for the needed $275k this should not be a problem. I do not have a warm fuzzy feeling regarding a kick back of $20k from the seller. Also the held escrow funds need to be approved by the prospective lender. The lender may also require that the repairs are completed prior to closing of the loan. This should not be a problem for the seller most vendors will complete the work if the monies are held for them in escrow. Question: what guarantee do you have that the seller will release the $20k once the loan is closed? Good luck to you

Answer 9

You are so right about morons trying to give snide remarks and making points for themselves. They will even give information that they don't have tried themselves. I resent knowing the right answer before I even ask the question and receive geometrically opposite info to just create a feeling of menace and deceit. God forbid.

Answer 10

There are two problems with that scenerio:

1) No bank will allow "cash back" on a purchase. They may allow you your earnest money back...but that is money you had to start with, not money you didn't have before.

2) One of your friends probably mentioned the idea of having the sellers pay it to you outside of closing...just know that it's not only mortgage fraud for transactions to occur outside of closing, it's a FELONY.

If there are Realtors involved, both of them can lose their licenses.

Answer 11

mortgage company probably wouldn't allow that - get the mortgage for 250 and refinance if you're positive you could refinance for more - or get a second mtg or line of credit for the 20k and refinance later