Mortgage Fraud???

Asked by Matt, Ohio Mon Sep 8, 2008

I am in the process of purchasing a new construction home whereby the seller has agreed to pay for closing costs and our 3% FHA down payment. We got in right before the government ended the buyer assistance program. As a result of all the funds we had to ask from the seller, we ended up agreeing to a purchase price that was $10,000 higher than the list price. The appraisal came back and was $12,000 below the purchase price. We don't have the $12,000 cash to make up the difference. The seller said that he would agree to give us a loan for $12,000 with terms being 15 years @8% that ballons at the end of 5 years. I don't believe he plans on taking a lien out on the home. It's basically a deal between us and the builder. Is there any legallity issues with doing this? I don't want to commit to anything that could get me in trouble down the road.

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Tracy Johns, Agent, Cincinnati, OH
Thu Dec 18, 2008
After reading some of the agent answers provided I just have to say "what the heck?"
First check w/ your lender to see if FHA will allow this. But, come on guys!! If the seller pays a buyer's down payment and their closing costs, since they don't have the funds available, wouldn't you expect to pay him back that $10,000 some way? The remaining $2,000 of the $12,000 from the appraisal is the only real discrepancy in the price. Plus, the seller/builder is willing to hold a soft second mortgage which means wait to get the rest of his equity, and wait to get this in this market?? Someone should be kissing this builder on the cheek for being finance savvy and doing what it takes to get homes sold! Then, go in and tell the builder a 5 year balloon at 8% won't work--negotiate it.

Good luck!

Tracy Johns
RE/MAX Unlimited
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Bob McClure, Other Pro, Walled Lake, MI
Sat Sep 13, 2008
good evening matt..there is nothing wrong with a subordinate lien from any seller, and fha will allow previously suggested...why would you buy it fo rmore than it's worth?...also, is the second lien something that will be acknowledge to the first lender?.or put on after the closing?..........the amendatory clause in your fha purchase agreement addendum allows you to back out of the deal if the house doesn't appraise for sales price....the seller knows have every right to go back to him and ask to re-write the deal at the apraised value with all of the same seller concessions....if he won't agree to it...tell him you will walk......see ,also knows that if your lender cannot get it to appraise....most any other lender won't either.....he will agree to the deal....pls let me know how things turn out...i hope that helps...bob mcclure- mortgage now- farmington, michigan.licensed in 19 states including yours...
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Hal Goldstein…, , Nassau County, NY
Fri Sep 12, 2008
There seems to be a lot going on here, my advice to you would be to find a good REAL ESTATE ATTORNEY who is not associated with anyone in the transaction. Builders are very smart, most have been in the business many years, and unless you find someone equally smart to represent your interests you’re going to get hurt !!!
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Brittany Sim…, , Columbus, OH
Thu Sep 11, 2008
The only problem with this scenario is that you are over paying $12,000 for the property. With values declining, especially on new construction, why would you agree to it? I guarantee that he will have to drop the price to sell to anyone else...

If I were representing you in this transaction, I would be fighting for the BUILDER to make up the difference. NOT YOU.
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John Wirsing, Agent, Pepper Pike, OH
Mon Sep 8, 2008
If it quacks like a duck, flies like a duck----IT's probably a duck!
There are a couple 0f issues here:
Do you want to pay more than a house is worth?
If you agree to pay more than appraisal, that's in effect what you would be doing.

I'm not a lawyer, but at closing, your lender will ask you to sign an agreement that states that there are no side deals . But, if you have this note with the seller , you will be in violation of that agreement.

I would be very cautious about proceeding on this deal as it is laid out in your explanation. If I could be of any assistance, give me a call at 440-487-2193 or e-mail me at
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Mary Starkey, , Dayton, OH
Mon Sep 8, 2008
Matt, first of all I would not recommend paying more for a home than its appraisal. It may take a long time for the market value to appreciate $12,000.T hat said, I just closed a deal with a new construction market home in the Lebanon area, in which my buyers paid full price for the home but the seller paid the 3% down payment and all the closing cost. Builders are under stress during these times so bargain hard with them.
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John Youker,…, , Beavercreek, OH
Mon Sep 8, 2008
This is really a question for a real estate attorney, as we are forbidden by law to give legal advice, but I will say that I have NEVER been in a closing where the lender did not ask the buyer and seller to sign a form that stated that there were no side deals or loans or money given that was not disclosed on the HUD as part of the deal. So if you sign that and do not disclose, common since would tell me that you are committing fraud.

I would seek the advice of an attorney. It sounds like the builder is doing a seller carry-back for a second mortgage to help you purchase the home - but all this must be disclosed to the bank to see if they allow that to happen and how it changes your ability to buy the home since now your payment will be higher.

Good luck.
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Other/Just L…, , Fleming Fitch Grant, Holly Hill, FL
Mon Sep 8, 2008
You're smart to question the deal.

First, you must disclose the terms and payment of any private loan to your lender. So the $12,000 loan will increase your qualifying debt ratios.

Second, the loan from the builder to you to enable you to purchase the home will violate at least one FHA guideline even without a second lien from the builder. The loan itself will be considered an "inducement to the sale" which means it must be included in the maximum 6% of purchase price allowed for seller contributions to buyer's closing costs.

Third, the underwriter may feel uncomfortable with the whole deal
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