As more and more homebuyers look to parents and other sources for the lump sums required to make a down payment on a new home, the idea of down-payment assistance is becoming more familiar in the housing sector. However, any time that assistance goes undocumented with the mortgage lender, you’re likely to end up with a problem.
Banks are becoming increasingly worried about buyers and borrowers failing to disclose that their down payments are “gifts” or incentives rather than evidence of the borrower’s ability to save and budget effectively, and, as a result, more state and federal prosecutors are cracking down on investors, marketers and developers using the term “down-payment assistance” to run mortgage scams.
Of particular note is a recent spate of convictions and sentences handed down in the Stockton, California, area. Six co-defendants have recently pled guilty to wire fraud charges associated with down-payment assistance offers made to incentivize purchasers of properties in Sacramento, Stockton and Fairfield. One of the defendants in the case actually used his personal bank account to make multiple payments to multiple borrowers either for use as a down payment or to use as they wished. The lenders in question were not informed of the payments and reported that the move resulted in at least 31 fraudulent property transactions that involved substantial lowering of the sales prices without notifying the lender.
This is not the only case in which down-payment assistance has been abused or misreported in the region, either. A former employee of Stockton’s National City Bank was recently accused and found guilty of submitting false documents for borrowers and making down payments on behalf of borrowers who either had no intention of paying their mortgage loans or were financially unable to do so. National City Bank reported that it and several other entities lost more than $1.8 million as a result of that former employee’s actions. He now faces more than two years in jail and will be required to make restitution for the losses.
While down-payment assistance is not illegal, it is closely regulated because the size of a borrower’s down payment is often used to evaluate his or her credit-worthiness and determine how much money a lender is willing to loan on a home. Borrowers with deceptive down payments paint a misleading picture of their abilities to budget and save for a home, and they may also qualify for higher amounts of money than they would otherwise.
Down-payment assistance, whether in the form of a personal loan or a one-time gift, must be disclosed when applying for a conventional mortgage, and real estate investors who offer private notes should also investigate the source of their borrowers’ down payments if they use them to evaluate whether a loan will perform well or poorly.
About the Author
Carole VanSickle Ellis is the host of Real Estate Investing Today, a daily nine-minute investing podcast, and the editor of the Bryan Ellis Investing Letter. Contact her at editor@bryanellis.com or visit www.investing.bryanellis.com.
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