The Cashback Mortgage Scam

Ric Dean July 6, 2013 0

Imagine for a second that you are looking to buy your first home for you and your family. Now imagine that you are doing this in France.

The housing market in France is quite different from ours. It’s much harder to get mortgage credit, and you can typically borrow only 50 percent of the purchase price. Moreover, the money in most cases has to be repaid in a maximum of 10 years. So before buying your first house, you’ll probably have to spend years saving up your salary just for a down payment. As a result, you may well end up living with your parents (or worse your in-laws) until you are into your 30s.

In the UK, meanwhile, mortgage credit flows like water (remember the current economic difficulties were caused by bad mortgage debt). By putting down just 5%-10% of the purchase price, you can move your family right in, with 25 -30 years to pay off the loan.

But what if you can’t find the cash for even a small down payment? Without it, you fall firmly into the category known as subprime borrowers. There are plenty of options for subprime peoples, but most of those options are terribly expensive and as usually noted in the small type have huge penalties if you ever missed a payment.

As is the case with any worthwhile goal, some people look for other ways to achieve what they want; they cheat. In some cases, the cheating involves a sleight-of-hand maneuver known as the cash-back scheme which is illegal. One of the trickiest to catch forms of mortgage fraud the cash-back scheme is widely known among real estate insiders but is not that well known by the average member of the public.

So how does this kind of deal work?

Lets pretend for a second that you want to buy a house that costs £250,000 but don’t have £25,000 to make the 10 percent deposit required to get you a decent mortgage. The seller’s estate agent offers a solution to the problem: let’s make the official purchase price £275,000 instead of £250,000, but then in return, the seller gives you £25,000 in cash. This will be a separate transaction, which doesn’t need to be written into the mortgage contract. (A seller can legally offer cash-back, but it has to be reported to the bank, which would negate the advantage by building that into your mortgage calculations which might mean you don’t qualify.)

And there you have it! You have the £25,000 in cash you needed to get a great mortgage rate, and the seller still gets the original price of £250,000. The only difference is that the bank notes the sale of the house at an inflated rate of £275,000 (which could in turn help when selling the house). And, instead of borrowing 90 percent of the value of the house, you have in fact borrowed 100 percent. In short, you can purchase the property with no down payment.

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