by Rob K. Blake
Have you ever wondered if your agent and loan officer are doing something that could get you into trouble?
Buying a house is a complicated process and many times your lack of insider knowledge can get you in hot water.
Shouldn't the agent and loan officer be putting your best interest first?
Of Course!.....but unfortunately, it does not work out that way. The deal/transaction gets put first.....the part where the agent and loan officer both get paid. Once the agent and loan officer have started working on a transaction, they don't want anything to get in the way of the commission when it closes. It may be in your best interest to get out of the contract and not buy that home but the agents and loan officers are lazy and don't want to do the right thing. They want to do the easy thing. In this case, the easy thing is fraudulent and unethical.
I know while you are out looking at houses you have a million things to think about. In my experience, the inspection is something that can really be confusing if you don't know how to handle it. More importantly, you will be committing loan fraud without the proper counsel.
Usually, after you write a contract on a home and it has been accepted, you as the buyer have a home inspection done. The inspection is different than the appraisal. The appraisal is done to establish the value of the home. Appraisers will inspect the home also. The appraiser will measure rooms to verify square footage and note the condition of the home while they are in there. If they find any major problems that affect the soundness of the home, they will report that in the appraisal. The appraisal is submitted with the other loan documents to the lender.
Even though the inspection is not a requirement for the loan, every buyer should get an inspection. You as the buyer need to know if the property is in satisfactory condition and therefore worth what you are going to pay for it. You also want to make sure the seller isn't hiding anything from you. Buying a house and then having to spend hundreds or thousands of dollars fixing things the seller didn't want you to know about is not the dream of home ownership most people think of.
So, if the inspection report is not a part of the loan process....how could you commit loan fraud?
If there are problems identified from the inspection the buyers can either decide they do not want the property in that condition or request the sellers fix the problems before closing. The agents must have the buyer and seller agree in writing on any repairs inside the contract. Unfortunately, the agents like to have what is called "side agreements". A side agreement is an agreement that is not part of the real estate contract. The contract should be agreed upon by all parties and should have all information true and correct. With a side agreement, there is information that is withheld from some of the people involved in the transaction. The lender who is loaning you the money to buy the home and the title company who is supposed to be the gatekeeper for all the documents to transfer title correctly are the one left out.
Let's say there was a problem with the furnace on the home you were under contract to buy. You tell your agent you want the furnace to be replaced because the inspection report says it is unsafe. Your agent already knows the seller does not have the money to fix the furnace until after they get the proceeds from selling the house. How does your agent know that? Agents talk to each other all the time without you knowing it. Most agents technically work for the seller. That means they share information with the seller's agent all the time. They work together to get the deal done and if it is not in your best interest, then so be it.
The seller does not have the money to make the repairs before the close. The agents will have the you and the seller sign a side agreement stating either:
1. the seller will write you a check after the close for the repairs or 2. the seller will hire a contractor for the repairs after the close
The problem with these side agreements is they always favor the seller and more importantly, they are loan fraud.
For example, the inspection states the furnace needs replacing. Your agent is supposed to present the seller's agent with a contract amendment stating the seller will have a licensed contractor install a new furnace before closing. The seller will either agree to that and sign the contract amendment so it becomes part of the contract or not agree to that and you now have a decision to make. Do you want to buy a house that it supposed to be in good working order at that price when you know now from the inspection it isn't?
But like we discussed earlier, the agents both know the seller does not have the money to pay for the furnace. The agents are looking at losing their commissions and the seller is looking at losing the proceeds from the sale. So, they have you sign a side agreement. The seller supposedly will give you a check after close for the furnace or have someone replace it after the close.
This happens all the time. The agents and loan officer involved in the transaction would sooner cut off their right arm then lose a commission because of a faulty furnace. Here is what could happen to you ,the buyer, when a side agreement goes wrong. 1. The seller never gives you any money for the furnace or they give you a check that bounces.
2. The furnace is installed after the close by the seller's choice of contractors. Of course they will want to get the cheapest contractor they can find because it isn't their house anymore. The furnace get installed incorrectly or during installation something else in your new home gets destroyed and you have to pay for that since it is your house now.
3. The lender finds out about the side agreement and now calls the note due and payable.
If running the risk of depending on the seller and the agents for money isn't bad enough, think of it from the lender's side. They are the ones lending the money for your new home. They have a right to know that the collateral is not what is represented in the contract. Even though the inspection is not a part of the mortgage process, the lender doesn't contract to lend on a house that needs expensive repairs. Not only did you overpay but the lender get cheated too...it is called loan fraud.
Just because I mention the agents most of the time does not mean the loan officer is off the hook. They are supposed to protect the lender from any fraud and in the case of side agreements. What they are basically saying to the agents is, "I don't want to know about what you are doing just get it done so we all can get paid". The loan officers are just as guilty as the agents.
The Maine Creditor Update which is the newsletter for the Office of Consumer Credit Regulation has an article in it from its September 2004 issue.
It states, "Buyers and sellers of residential real estate will sometimes agree to "side deals" in which money changes hands to cover the cost of needed repairs or defects discovered on the property. However, if these adjustments are substantial enough to affect the value of the residences being used as security for loans to the buyers, and if the side deals are not reflected in the HUD-1 closing statement, then all parties to the transactions (including the settlement agents and the real estate agents) should carefully review their participation to determine whether legal or ethical principles are being violated.
In any FHA-insured loan, the buyer, seller and settlement agent each sign statements attesting to the accuracy of the figures being used. Knowledge of a substantial side agreement not reflected in the HUD-1 would almost certainly violate these representations. Maine law does not contain specific provisions prohibiting undocumented side agreements, such as the one enacted in Alabama which states that a real estate agent may lose his or her license for "misrepresenting or failing to disclose...the true terms of a sale of real estate" (Ala. Code, sec. 34-27-36(a)(21). However, parties to Maine transactions should not assume that the absence of a state law here means that such deals are permitted on mortgages headed for the secondary market, especially when the loans will be held or guaranteed by government or quasi-government entities."
If you are going to agree to anything you always do it in writing in the contract. That is what contract amendments are for. Real estate is all about the contract. You can't un-ring a bell. Even though the only thing the lender saw was the appraisal and it didn't uncover a faulty furnace, the problem is now out in the open and you have to deal with it. You are ultimately going to pay for the home and keeping a level head about right and wrong is important.
Do not let anyone talk you into signing a side agreement. You now know that it is not in your best interest and it is unethical and fraudulent.
1. Always get your inspection done early. Make it one of the first things you do after your contract has been accepted. The agents usually try to push this one until the end because they are already afraid something will be wrong and they figure the farther you are down the road, the more you will agree to things that are not in your best interest. Get it done as fast as you can. 2. Don't use the agent's inspection company or anyone they suggest. Find one on your own. If you now know that agents will use side agreements not in your best interest, then you also should know that they will use inspection companies that won't deliver a true picture of the problems with the home just get the deal done.
Good Luck in your House Hunting!
Rob K. Blake, author of the book Mortgage Secrets Exposed! and host of The Mortgage Insiders Show, has been teaching folks for the last 15 years all the tips and tactics to save $1,000s when shopping for a mortgage. For more home loan tips, Visit his website www.themortgageinsider.net .