Cash Back Deal – Too Good To Be True?

December 14, 2008 at 11:14 am Leave a comment

I came across a first-time home buyer the other day. He has indicated to me that a real estate agent from a prominent online real estate company promised him $1,500 cash back in the form of a check after buying a home with him.

My initial reaction was, that doesn’t seem right. By that, I mean, it doesn’t seem legal. So, I went ahead and did some further investigation. I called my broker at Realty Executives and left a message regarding the legality of such incentives. My broker called back and said, “Only if the lender allows it, can a cash back check be allowed. If the lender disapproves of it and the check transaction still existed, then it is considered lender fraud.” Nowadays, due to tight lending guidelines, lenders will not approve this kind of a deal.

The loan application Form 1003, which is filled out by the borrower, stipulates this regulation. Further, Title 18 of the United States Code, Section 1001, addresses the provisions and criminal penalties of fraud and false statements.

The bottom line is on these cash back incentives is that the lender (the bank that funds the loan) should be informed of the “true nature of the transaction.”

Whenever the lender is not informed in writing of the true nature of the transaction, the transaction is illegal. And if you go along with the scheme, you become an accomplice, subject to prosecution. A legitimate cash back incentive by a builder, Realtor or seller usually appears in the HUD statement prepared by a neutral title company, although giving a cash back check to the buyer after closing is not a common and acceptable practice.

So, what should you do if you sense something isn’t right? Call your lender immediately and let them know. They will be happy to receive your phone call.

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