Many people who are interested in purchasing real estate may have heard about cash back at closing. Cash back at closing may seem like a great way to get some extra money to increase the value of the property through home improvements or for some other purpose. In fact, cash back at closing is fraud and illegal. Here are the facts about cash back at closing.
What Is Cash Back At Closing?
Cash back at closing is a method in which the seller and buyer conspire to defraud the lender. It works as follows. A house is on the market for $500,000. The seller and buyer come to an agreement that the buyer will buy the house, although he only intends to pay $450,000. The buyer goes to his mortgage lender and obtains a loan for the entire $500,000, which he pays to the seller for title to the property. When title is transferred, the seller gives the buyer $50,000, which he can use for whatever he chooses.
What Is Wrong With Cash Back At Closing?
Cash back at closing is wrong because it involves conspiring to mislead a lender in order to receive more money than one should. Some people feel that if the market value of the house is equal to the amount of the loan, nothing untoward has been done. The reality is that the market value is determined by what people are willing to pay, and therefore the amount of the loan exceeds the value of this particular home at this particular time. Therefore, if the buyer defaults, the lender may not be able to recoup its full investment in foreclosure.
Why Is Cash Back At Closing Illegal?
To be specific, Title 18, Section 1001 of the U.S. Code clearly states that a person cannot lie on a loan application or any real estate transaction document. Listing the value of a property that is higher than what a person is actually going to pay is therefore a violation of the U.S. Code.
What Are Some Alternatives To Cash Back At Closing?
If you need money for home improvements, you may consider buying the home at the agreed upon price with a traditional mortgage, then refinancing or taking out a home equity line of credit at some point in order to make the repairs. This can increase the home's value without requiring inappropriate means of obtaining funds.
