Dear Monty column: Is raising the price $5,000 for buyer closing cost illegal?

Richard Montgomery
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If the agent participated in this action without the lender's knowledge, the agent could be reprimanded, fined, jailed and possibly lose their license to practice real estate. I am not sure what the penalty would be for the attorney, but it would qualify them to be on HUD's blacklist, and the state in which the attorney practices may weigh in with some sort of penalty.

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Reader Question: I recently sold a home, and the buyer didn't have enough money for closing costs. They asked me to sign papers that raised the purchase price $5,000. I want to know because the buyer got $1,000 of my hard-earned money. On the day of the closing, I hadn't cleaned everything, so I told his lawyer I needed another day to finish up. They agreed, but I thought it was midnight the next day, and it was noontime. I made a mistake, so legally, they can do that. I want to recoup my money the same way they took it from me. 

I was out by 5 p.m. I helped him out by letting him close a week early. I left the paint to cover any scratches and the spots where I spackled. On the day of the closing, I showed him things about the house that weren't evident (like how to operate the furnace, change the filter on the water purifier, the new windows, etc.). I signed papers to have money to close the deal (for more money than what it sold for). I lose a grand on a technicality just because they can. I'm a firm believer in karma, but not a thousand bucks worth. How illegal is this, and is the buyer's lawyer and/or real estate agent liable?

Monty's Answer: It is not clear with the information you provided whether or not the transaction is illegal. Most mortgage lenders today sell the mortgages they produce on the secondary market. The primary buyers of these mortgages are Freddie Mac and Fannie Mae. These companies are public government-sponsored enterprises that help expand ownership. Large commercial banks and other companies also buy home mortgages. Then, there are government agencies that make home mortgages as well. Federal Housing Administration (FHA), Veterans Administration (VA) and The Federal Land Bank are other examples of secondary and direct lenders.

The rules for underwriting the loans vary from company to company. For example, the VA loan requires the borrower or co-borrower to be a veteran, and there is no down payment required.

The situation you described is an "interested party contribution." Here is how Freddie Mac describes this concession:

"Based on "value," as defined in Section 4203.1, the maximum permitted financing concessions are as follows: See the chart on Loan to Value (LTV) ratios for Freddie Mac loans by clicking here."

The key for you to determine is whether or not they reported your concession to the lender. You can determine this by reviewing the HUD sellers closing statement you signed at the closing. If they disclosed the $5,000 seller concession to the lender in the HUD closing statement, the transaction might be legal. If they did not reveal the concession to the lender, the sale might well be considered fraud. Consider seeking further clarification at Freddie Mac fraud prevention.

Richard Montgomery is the author of “House Money - An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He is a real estate industry veteran who advocates industry reform and offers readers unbiased real estate advice. Find him at DearMonty.com.

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