Loans Answers

Purchase price vs home value

Question: We have a unique situation(at least I think so) in southern California:

Property Value: @ $400,000 Purchase Price: $355,000

We are looking to buy a home. A friend of ours is selling his home. Our friend also owes us about $45,000 which he does not have. Thus the difference in the value and the purchase price.

We thought for sure this would be a great opportunity for us because we don’t have a down payemnt for a home. We could use the the value of the house to our advantage. After all, we are borrowing less than what the house is worth.

However we have found out this is more difficult than we expected. All the loans we have inquired about are based on the purchase price and NOT the value. They all still want a down payment.

We can get a 103% loan at 7.5%. But we have excellent credit and want a better percentage rate…like 5.2%.

So we thought we could take this 103% loan and immidiately refinance at 5.2% using the value of the house. BUT…there is a seasoning period of about 12 months before we can refinance.

Is there any way we can take advantage of this opportunity and still get a good interest rate?

ANY suggestion or resources would be helpful. This is really frustrating.

Thanks in advance,

Answer: None that I know of in the sense you are thinking of.

However, fraud in the inducement is grounds for rescission. In this case it would be difficult to rescind the transaction because the borrower cannot return the funds. But this allows the bank to get judgment against the buyer for the full loan amount. And this type of judgment (obtained as a result of fraud), cannot be set aside by a bankruptcy. In other words, as long as the borrower pays, the bank will never know and no one will ever care. But if the borrower defaults and the bank discovers the fraud, they can collect, even if the borrower tries to get out of it through bankruptcy, and even if the state does not recognize deficiency judgments.

Now, I grant you these are long shots. It’s not likely to happen. On the other hand, whenever I see people pulling stuff to get higher loan to value ratios, it smells like a market that is about to pop. I’ve been through the real estate disasters of 1968-69, 1973-74, and 1978-82. After a while your nose becomes sensitive to the warning signals. If the market does go into a downturn, that’s when the default rate starts to skyrocket. And the first borrowers to default are always the ones who are the most extended.

I do know of half a dozen cases from the collapse of 1978-82 where banks followed borrowers right through their bankruptcies and are still collecting.

Having said all of that, there is a far more likely evil that will happen if an agent is involved. Allowing the fraud to be perpetrated, even if the agent is not directly a party to it, is grounds for disciplinary action. In all the states where I work, if the licensing agency hears an agent was involved in a transaction with dual contracts, that agent can pretty well kiss his ticket goodbye. If you think about it, it would be pretty hard for an agent to disavow knowledge of it. I’ve seen numerous cases where the agent was suspended or revoked for this sort of thing.

[RantMode:On] And, in my opinion, they should be drummed out of the business. If they’ll perpetrate a fraud on a bank, sooner or later they’ll do so to a client or customer as well. Color me old-fashioned, but if you have to cheat to make a living in your field, then you need to find a different field. I have a net worth sufficient to hold me comfortably to the end of my days, and I made it all in real estate. And I never had to cheat anyone to make it.

I realize that people think bankers are spawn of the devil. Sometimes I think I would agree with them. But regardless of how evil they are, fraud is still fraud. It’s still wrong and I won’t be a party to it. And I’d steer clear of any clients or customers who want me to be involved in it. [RantMode:Off]

And no, I didn’t intend that for you, Stephen. I have no idea what you personally think of these things or what your ethical standards are, so please don’t take it as a personal attack. I’m just tired tonight and a bit cranky. And I am mostly tired of seeing people post in here as though this sort of thing is normal and ethical. It’s not.

And now that I’ve said so, I’m going to shut up and shuffle off to bed

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