Is it legal to receive cash back at closing? If so, how do you go about structuring a deal like this? I have ‘googled’ this subject and read that receiving cash back at closing is NOT legal, primarily because of inflated appraisals.
I have just been pre-approved to purchase my first home at 100% financing. This is for my primary residence and not an investment property. So I won’t be looking to assign my contract. I intend to purchase below market value from a motivated seller, short sale or an REO (bank foreclosure). If I purchase my home below market value and below the appraisal amount, then is it legal to receive cash back at closing? If so, how is this done? Does the property have to need repairs for this to be legal?
In general, banks don’t allow cash back, especially on 100% financing. A lot has to do with appraisals not being an exact science. Some lenders do allow you to receive money back in an escrow account that MUST be used to pay for repairs.
Cash back at closing is not illegal unless there is fraud involved; inflated appraisal, false loan application etc. Most lenders will only lend a percentage of the sale price or appraised value whichever is less. Others will certainly offer ideas for structuring cash back.
There is no law against receiving cash back at closing. It’s the fraud that is sometimes used to get it that’s illegal. You will dramatically increase the possibility of legally getting cash at closing if you are working with a direct portfolio lender.
I get cash back on deals by having the money paid to my Holding Company which is a thrid party involved in the purchase. Many people say its illegal, but many assigners call part of their fee a marketing fee and its paid in that form to them or the company.
I do it the same way. If I was a realtor, I would be entitled to collect a commission on the property but I am not, so I collect a marketing fee.
This is in no way FRAUD. In fact builders call it that to pay out of state realtors or the few realtors paying commissions to out of state realtors who bring them the buyer. They have to classify the commission/payout somehow.
Also since my company recieves cash, it is responsible to claim it as income and the title co will report it on a 1099.
It is completely legal to get cash back at closing. As Danny said, your best chance at getting cash back is through a portfolio lender, meaning a bank that keeps their loans in their own portfolio. I would go one step further and say that you need to use a small local bank.
The key to doing this is that you must buy the property at a BIG discount. Banks need some security, expecially if you are receiving cash back. In my experience, small local banks will loan up to 70% of the appraised value (using their appraiser). If you buy the property below that value, you can get a check for the difference at closing. I’ve done this several times.
CAUTION: Do not borrow more than you need. The gurus are big on pushing cash back at closing, but you should remember that you will be paying it back with interest and over a relatively long period of time. Borrow too much and an investment property won’t cash flow.
By way of a commission rebate from the realtor and/or mortgage broker/lender (must be stated on the HUD-1).
A majority of lenders allow for seller concessions upto 6% for 90 LTV/CLTV loans and 3% for loans between 95-100% CLTV (again it must be on the HUD-1).
Generally speaking, any monies paid to a BORROWER (the individual filling out the loan application) that is NOT documented on the loan application is considered FRAUD (the law that governs real estate transactions is Title 18, United States Code, Section 1001 [can be found on page 3 of a loan application; http://www.cfsan.fda.gov/~lrd/uscfraud.html].
I hope that you aren’t getting your legal knowledge from newspaper articles. I glanced at both of those articles and they were mortgage fraud. One statement in the second article was true:
The key to avoiding liability is fully disclosing any cash deals.
This statement is absolutely correct. You can get cash back at closing for any reason AS LONG AS YOU DISCLOSE IT TO THE BANK. I’ve done it many times and it was perfectly legal. I told the bank that I wanted cash back right up front and they gave me the check at the closing. COMPLETELY LEGAL.
MIke whats bank gave you a check at closing …What was the purchase price to the ARV, was it a rehab, doing a conventional 30yr mortgage, etc…I am curious…
I too am curious on what lenders allow for cash back at closing. It has to be local banks holding their own notes because NO conventional lender that sells their paper on the secondary market would allow it. Especially here in Texas where the cash-out laws are draconian.
Chris…whats up with TX and the 80% LTV on refi law. If I am an investor and buy at 60% on the dollar, and wanted to refi to 90% LTV will they allow me as an out of state investor??
I find it so hard to believe a state can control how much equity you need to maintain in a home you own especially when people refi to pay for important bills sometimes like college or medical, take once in a lifetime trips, pay for weddings, etc…
Yes, every time that I have gotten cash back, it has been with one of two small local banks that I use. I always recommend using small local banks for investing. I have gotten the money back for rehab expenses and once (early on) just for operating captial. I bought these and all my properties well below 70% of the appraised value - WITH THE BANK PICKING THE APPRAISER. Then, I took cash back in the spread of what I paid and what the appraisal was. Once this cash back was $13,0000.
I understand cash back at closing regulations because this is what I do for a living (being well read/up to date on matters is a small part of my due diligence).
The last four words of my OP is “you need to disclose it” and if you don’t, it’s fraud…what part of that are you disagreeing with?
I agree with your statement about disclosure. My only point is that there are more than 2 legitimate ways to get cash back. It certainly isn’t limited to commission rebates or seller concessions. I’ve gotten cash back many times, never for one of those reasons.
All my cashback deasl are structured where the money goes to my holding company which then pays to my my mgmt company as a fee and then eventually me as salary. Almost each time its done, it shows on the HUD-1 as a payment from sellers proceed to my company.