Q: Here’s my question: Let’s say a seller lists his home under market value and a buyer offers to buy the home at a higher market price. Can the parties agree to have the seller pay the difference between the listing price and the true market price to the buyer?
If the buyer is an investor (he won’t live in the property), does he need to inform his lender of this arrangement since he is already prequalified?
Since this would be a separate signed agreement between the seller and the buyer, does the lender even need to be notified at all?
Uninformed persons have suggested that it is illegal lending activity. I have inquired and have reviewed documents including the Truth-in-Lending forms and have found nothing to prohibit the transaction. Can you tell me where I can find any information?
A: A buyer and a seller can agree to one price in a contract and agree that the seller will credit or pay the buyer money back at settlement. If the seller is willing to sell a home for $100,000 and the buyer is willing to buy it for $110,000, the contract can state that the seller will credit the buyer $10,000 at settlement.
Keep in mind that for all practical purposes, the seller sold for $100,000 and the buyer purchased the property for $100,000. The seller and buyer may have additional closing costs due to the increased purchase price and this scenario would not be recommended.
The reason some people might suggest this transaction is illegal is because you have a lender involved.
The Department of Housing and Urban Development (HUD) oversees all residential real estate transactions with federally regulated mortgage loans. You may have become familiar with the settlement statement called a HUD-1, sometimes called the “RESPA statement”, because it is required under the Real Estate Settlement Procedures Act.
HUD’s rules provide for the HUD-1 to be used in each and every real estate transaction and you probably have signed at least one in the course of your real estate dealings.
The HUD-1 clearly states that it is illegal to knowingly make false statements. Any false statement can be punishable by fine and imprisonment under Title 18 US Code Section 1001 and Section 1010. Further, the form states that the HUD-1 has been signed and is a true and accurate account of the funds received and disbursements made in the transaction contemplated. You also need to keep in mind that it also includes whether you falsify, conceal, or cover up by any trick, scheme, or device a material fact.
In essence, you are put on notice that all relevant facts relating to the transaction are reflected in the HUD-1. That’s only part one. If you are dealing with a residential lender, just about all of them require the buyer to sign documents that state that the buyer and seller have no side deals between them and that the settlement statement accurately reflects your transaction.
Lenders will allow some money to flow from the seller to the buyer at closing, but the nature of those funds must be disclosed to the lender. In some cases, sellers can pay several points towards the buyer’s closing costs, towards special assessments due to a homeowner’s association, towards lender fees and costs and even towards lender points (a lender point is one percent of the loan amount). A point can be one percent of the purchase price.
Other permissible payments are rental credits for rent and security deposit paid by a tenant at the property. When properly disclosed and documented most lenders will allow these kinds of payments.
In your case, you are hiding the payment from the lender. The lender is willing to loan to you the lesser of the contract purchase price and the appraised value of the home. The lender determines how much it is willing to lend you on the basis of these facts, your credit history and other factors.
The under-the-table payment of money from the seller to the buyer changes the lender’s criteria. If the lender is only willing to lend you 80 percent of the purchase price, the lender expects you to put into the deal 20 percent. If the buyer is refunding money to you, you aren’t putting in 20 percent, but rather misrepresenting the transaction to the lender.
When some people told you that they felt your plan was a fraud they were correct. Not only that, some states, counties and municipalities have real estate transfer taxes. When you complete these forms, you are certifying that the purchase price is accurate. In your situation, the purchase price is not accurate. There may not be a legitimate reason for the payment from the seller other than to put less money down on the purchase of the home and hide information from the lender. If this is the purpose, you should not do it.
Finally, HUD does not regulate commercial deals. If you are financing the purchase of the property with a commercial mortgage lender, and the use of the property will be for business purposes, these HUD rules don’t apply.
But the lender’s rules still apply. You’ll find that in the commercial lender’s loan package, there will be various representations as to the transaction and any attempt to get money from the seller will violate the covenants you have signed with the commercial lender.
Published: Jun 6, 2006
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