The recent cooling of the residential real estate market in most areas of the state has created a new opportunity for those inclined to defraud their lenders. We have seen buyers making offers that exceed the listing price and then requesting a credit to be refunded back to the buyers. The credit is usually equal to or slightly more than the difference between the offer and the list price. For example, a buyer might make an $800,000 offer on a house listed at $750,000 and then ask for a credit payable from the sellers’ proceeds in the amount of $60,000. In this scenario, the sellers’ net is $10,000 below the list price. The credit is typically memorialized in an addendum rather than as a term in the offer or counter offer.
An addendum is used because most lenders will not approve a loan where credits exceeding 3% of the purchase price are either given or paid by the seller for the benefit of the buyer. If this type of arrangement was placed in the purchase agreement, the lender would see it and deny the loan. As lenders rarely ask for addendums, there is no practical way for the lender to know that a large credit is being paid to the buyer if such a term is placed in an addendum.
If a buyer defaults on a loan, the lender could conceivably sue the agents involved in the transaction. As most real estate agents know, lenders do not typically see addenda. A lender would have little difficulty proving that the real estate agents conspired with the buyer to defraud the lender by withholding information critical to the loan application process. As the seller also executed the addendum, an aggressive lender could pursue the seller as a party to the conspiracy to commit lender fraud. If confronted with one of these schemes, an agent should refuse to participate and should advise his or her clients as to the risks of participating.
There may be times when a large credit legitimately should be paid by the seller to the buyer. In this situation, the agents should demand a letter from the buyer’s lender acknowledging that they are aware of and approve the credit. The agents should verify that such a letter actually comes from the lender and not a mortgage broker who may be part of the scheme.