Posted by John Merchant on November 22, 2002 at 22:09:07:
A deal like this could have some serious drawbacks. If a new institutional first mortgage is involved, the HUD 1 loan application inquires as to what the down payment is. If the loan applicant fills in the blank with a non-existent or fictitious down payment sum, and deliberately conceals from the lender that
- There really is NO down payment, or
- The Seller is really providing the down payment, or 3. The Seller is carrying back a 2d mortgage on the property…if any of these things exist, and the main lender is misled or deceived, then this could be illegal fraud under Federal law…and subject to criminal prosecution.
Sadly,I’ve seen a number of deals where the mortgage broker was actually encouraging the borrower applicant to LIE about this and state some kind of non-existent down payment.
Those mortgage brokers are themselves breaking the law in “winking” at these false statements, and ought to be put out of business.
Now, there may be nothing in the world wrong or illegal about “gift of equity” but just be durned sure that you don’t sign some kind of loan app or doc stating some kind of non-existent down payment…because no matter what the banker or mortgage broker might say…that is fraud on the lender!