"Creative Financing" Could Hide Fraud
In the current real estate market, lots of potential home buyers are looking to pick up a great deal. But beware - some deals that look great on the outside could have a rotten core.
Say you're been looking around, but you don't have a lot of money for a down payment, so you've been looking at lower priced, older homes. Then a builder offers what seems like a huge bargain - to sell you a brand new home with zero down payment. He's got a number of unsold homes or condominiums that he's having trouble moving with the bad economy, so he's offering some "creative financing" to clinch the deal.
Builder bail-out schemes
But what he terms "creative financing" could actually turn out to be "mortgage fraud." The FBI is reporting an increase in what are known as "builder bail-out" schemes, where unscrupulous builders or developers cut legal corners in an effort to sell homes.
In one variation on this scheme, suppose the property listed for $240,000. But home values have declined, so the builder is willing to sell the home for $200,000. But the way it's presented to the buyers is that the builder will chip in $40,000 for a down payment, so the buyers only need to borrow $200,000 for the mortgage loan, putting up none of their own money. But the builder certifies to the bank that the borrowers have paid him $40,000, meaning they have equity in the home and the bank issues a loan for $200,000.
The victim in this exchange is the lender, who essentially is issuing mortgage worth 100 percent of the property value, instead of a safer loan secured by a 20 percent equity stake. However, the buyers can be unwitting accomplices here - they could be charged with mortgage fraud, a felony, even if they didn't realize the arrangement was illegal.
Fraud increases in weak housing market
The FBI says builder bail-out schemes tend to become more common in a weak housing market where builders and developers are having trouble selling the homes they've built and are facing deadlines for repaying construction loans. Many types of mortgage fraud increase in a down economy, although builder bailouts are one of the main types that may harm home buyers, whereas other types tend to affect investors, elderly homeowners or persons facing foreclosure.
Some of the warning signs that a home purchase transaction might involve a builder bailout fraud include: 1) financial incentives that are not listed in the purchase agreement, 2) a down payment incentive above the purchase price or an increase in the purchase price to allow a giveback incentive by the seller 3) heavily promoted no-money down offers in new developments with a large number of unsold properties.
If you have concerns that a package of sales incentives may not be legitimate, it's a good idea to check with your lender to make sure they pass muster - real estate financing can be confusing and many complex arrangements are legitimate. You can also check with your regional FBI field office or state attorney general, either of which will have departments that deal with mortgage fraud.