Legit 100% Financing?

Question

Hello, I'm pretty new to REI and i've been looking for creative financing to save as much cash as i can. Last week i was referred to a Mortgage Company by a Hard Money Lender. And it turned out they're offering 100% financing and possibly extra money for rehabs.

It took the mortgage officer a while to try and explain this whole process. Here is how it structures/works:

Actual Purchasing Price: $30,000 (Seller gets paid this amount)
Inflated Purchasing Price $36,000 (This is the amount the lender will lend)

The trick is that I will sell the seller a package of  "Home Discount Products" 
and I will get 16% commission which is $5760. I will then use this amount to pay 10% down payment ($3600). The rest of the left over money I will pay toward closing costs ($2160). In this case, If i use 20% commission, I can take some of the left over money for rehabs.

A few rules:
1) Commission % cannot exceed 20%. 
2) Appraisal Value of the house must be equal or higher than the "Inflated Purchasing Price".

Further clarification, this Home Discount Products is  a company set up by the founder of this Mortgage company as a dummy company that works  solely for this creative financing purpose. Another thing is that at the end of the year i will get a tax form from this company where i would pay 15% of the total commissions i made :(.

Infos on the Mortgage company:
Phoenix Mortgage Group LLC
http://www.phoenixmtg.com/
Their commercial lending company is
http://www.wepinc.biz/

I've heard of mortgage fraud and i have a few doubts about this company. 
I'd like to hear some professional opinions on this. Thank You

-Nathan

Brian Million · Answer

I've been in residential mortgage lending for 10 years and I agree with McKee in this regard; there is no legal way that a lender can offer you a loan knowing that you are receiving money back. The key word here is "dummy" company.

When someone uses the words "inflated price", "dummy company", and now "Home Discount Products"....run to the nearest exit.

FHA 3% down if it is an owner occupied property. You may use downpayment assistance if you are utilizing a Non-Profit or government (city, county, state) to pay the 3%. If you are wanting to complete some repairs, try the FHA 203k (you may purchase your appliances in this program.)

Ingrid Nagy · Answer

Can you still get 100% financing?  A friend of mine, a mortgage broker, recently told me those days were over with the collapse of the mortgage market.

In the late 80's I bought my first prop no-money-down for $65K (someone appraised it at $82K).  Of course I had to list that I would be an owner occupant.  6 mos later the market collapsed and those same condos were worth about $45K.  No one would touch financing them and we sat on them renting to keep afloat because in this particular neighborhood people had jobs but no one had down payments.  Several friends who bought units as investments went belly up (these were successful accountants, etc.).  Some lost units to foreclosure; another went bankrupt.  In 2006 & 2007 I saw the same "no money down" schemes enjoy a rebirth at this building.  We're back in the downturn and nothing at the building is moving sales wise - no financing available.

FHA 3% down loans are the closest I've seen lately anywhere near the former trend.  The banks are very gun shy and the appraisers are more reserved than ever.

Kevin Adams · Answer

Good call Mc Kee

Tay Gainey · Answer

Could you clarify this technique a little more for me please? So, if i want to buy a property from someone. But i dont have down payment. I do a"unitl " agreement/contract with the seller and open escrow.I make repairs to this person's house out of the escrow account? Or is that money just sitting there for security? And lets say i cant get financing. Then the seller is suppose to give me my money back correct? But what if he decides not to, what legal recourse does one have?

Stephen McKee · Answer

Wow, im not a NAR investigator but listing there company name here is not a great idea. This is another version of a work around people in the MTG industry do to get cash back at the end.

Remember this: There is no legal way for a buyer to recieve cash in hand without the investor/lender knowing about it. NONE, NONE , NADA, NO WAY, NO HOW.

I do applaud him for creativity but I would not go about it this way. The best way I have found to buy a distresses property and not have to come out of pocket that much is to buy with an 'until clause.

In this case the property must be vacant or you have to move the tenants/homeowner. Draw up your contract like this.

Do a buyer 90 day lease option and open escrow

Seller allows the buyer to do make repairs while the property is in escrow.

Buyer will make sellers mortgage payment until financing can be aquired by the buyer.

In the event that buyer cancels escrow all repair costs will be forift and no money will be owed by the seller.

In the event that seller cancels escrow all repair costs will be reiburst to the buyer at fair market value or buyers cost of repairs, which ever is the greater.

Note the word "until". If nessecary you can make the payments on the sellers property for years. That's not the idea but it keeps both people locked into contract. "Until" means forever.

This type of transaction does require you to earn the trust of the seller but the only hard money you will need is the repair cost and the mortgage payments. This way you will be able to close with a completed house, have no appraisal issues, you could even borrow the down payment from a hard money lender if nessecary, and have one new loan at close.