Mortgage Question- Why Would This Be Done?

Discussion in 'After Hours Lounge (Off Topic)' started by James Edward, Aug 10, 2003.

  1. James Edward

    James Edward Supporting Actor

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    My friend recently sold(hopefully) his home for a price of 275,000. A contract was signed, and after not hearing from the buyers for a period of 5 weeks, they resurfaced with this:
    They will be getting 2(two) separate mortgages- one for 254,000, and one for 38,000, for a total of 292,000.
    Their lawyer drew up papers stating that at closing(settlement), my friend(the seller) would give them a check for 17,000- the difference between the selling price and the sum of the 2 mortgages.

    Does anyone know why this would be done? Or more importantly, HOW could it be done? I know I would have liked some extra cash when I bought my house, but how could the bank approval/appraisal allow this? I seriously doubt the house would appraise higher than the selling price of 275k. And, to top it off, they only put down 5%.
    Any thoughts? Thanks
     
  2. Todd Hochard

    Todd Hochard Cinematographer

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    How- I have no idea.

    Why- because, I'm guessing these goofs are hell-bent on living beyond their means, and would like some cash in their pockets to finance their excessive lifestyle for another year or so. After all, they can't give up the Bimmer or the Range Rover for something so trivial as a home purchase.[​IMG]

    Just a guess.[​IMG] We have friends (who are utterly dependent on some wealthy people in their family dying to get out of debt) like this.
     
  3. Glenn Overholt

    Glenn Overholt Producer

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    I hope that is 17k, or my eyes are fading out.

    At any rate, I think the 17K might be for the closing costs. Usually they just draw up another contract and take the money out of the 292k so your friend would only get the 275k. I'm not positive on this. It does sound a little weird.

    Glenn
     
  4. Tom Meyer

    Tom Meyer Second Unit

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    there's *no* way closing costs can be $17k. Closing costs may be a couple thousand, but 17k ? Noooo way. The problem I see is that now maybe your friend has to report the sale as sold as 292k, which may affect his own taxes. He should definitely talk to *his* lawyer or agent about this little irregularity.
     
  5. nolesrule

    nolesrule Producer

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    Is the closing being done through a closing agent or is this a "by owner" type situation?

    When we closed on our house, the mortgage company couldn't give us an exact amount for what we needed to bring to closing until two days before. We use an online bank, so I had to order the certified check about 10 days ahead of time. Anyway, the title company/closing agent where we did the closing cut us a check for the difference. If the closing is being handled by an agent, the settlement agent will usually take care of making sure all the money ends up in the right place at closing.

    I have my HUD-1 settlement statement in front of me right now and it looks like this can be done just fine. All the seller is doing is, in effect, making change for the buyer. This shouldn't affect the reported sales price because the seller is only keeping the money equal to the sales price.

    On the buyer side of the HUD-1 statement, it adds up the deposit and total amount of the loans to figure out total paid by borrower. It then calculates the gross amount due from borrower (purchase price + closing costs). The line below that subtracts total paid from total due. Usually, that would leave you with the amount that that the buyer needs to have a check for at closing. In this case, the buyer would receive a check for that amount.

    It's really not that uncommon to get a little extra in the loan for purchases for improvements and appliances, but I don't think I've ever seen it that big.

    The real problem is making sure that the buyers don't cash that big check before the seller's money is in the bank.
     
  6. CRyan

    CRyan Screenwriter

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    This is commonly done to prevent the need for PMI (mortgage insurance). The second loan is used primarily for the down payment and this is much cheaper than PMI with the current rates. The $38,000 will partially be applied to the 20% down payment. 20% is the standard down payment to get away from PMI. Also, I would guess their credit rating is very good where they were able to get the loan in an amount to help with remodeling as well.


    C. Ryan
     
  7. DaveF

    DaveF Moderator
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  8. Tim Abbott

    Tim Abbott Second Unit

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    Some lenders allow for 107% financing. It can be a risky proposition.

    It definitely can be done but you will pay for it (interest rate).
     
  9. Doug_H

    Doug_H Supporting Actor

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    I just did something like this when I closed in June. Two reasons I did it.

    1. Mortgage insurance as explained above.

    2. I wanted to replace the floors in the house with wood and this allowed me to do so. The smaller loan allows me to pay it off quickly thus avoiding paying 20-30 years of interest on the floors alone.
     
  10. James Edward

    James Edward Supporting Actor

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    Thanks, Glenn. I edited my post to reflect the correct amount(17k)

    Interesting answers. I'll let everyone know what the ultimate outcome is- closing date has not been set yet. But then again, considering the 'creativity' of this financing, that's no surprise.
     
  11. Leila Dougan

    Leila Dougan Screenwriter

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    This situation doesn't seem too unusual EXCEPT for the fact that teh 17K shouldn't have to be paid back by your friend. If the mortgage company/bank want's to play games with the 2 mortgages and whatnot, that's fine, but to expect your friend take the higher sum and then pay them back? Why can't the mortagage company deal with the difference?
     
  12. PeteyG

    PeteyG Stunt Coordinator

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  13. Todd Hochard

    Todd Hochard Cinematographer

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  14. Patrick Sun

    Patrick Sun Studio Mogul

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    I think it would be more preferable if they took that $38,000 check from the 2nd loan, deposited it into some account, and then pay off the rest of the loan, and keep the $17,000 in the account. Having the seller turnaround and cut the buyer a check just doesn't seem to be a good idea. If I were the seller I wouldn't do it (cut them a check for the difference - it might be some strange scam).
     
  15. Andrew W

    Andrew W Supporting Actor

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    This looks like one of those Nigerian scams to me. The way the deal typically works is that they give you "certified" checks and you give them change for the difference. The only problem is that the checks are counterfeit, so you ended up giving them real money for nothing and your bank never releases funds into your account. You should verify both funds and issuance on the checks the buyer is going to give you and don't pay until you are sure that the checks are real and the money is in the bank. Just because it is from a mortgage or lending company isn't good enough. Some of these guys will go to extreme lengths to establish fake businesses and credentials. It's worth it to them if they can take you for $17K.
     

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