Banks Involvement in Promissory Notes?

4 Replies

Classic apology for asking something that I’m sure has been asked before, but I can’t find it so that’s okay. 

Say a friend is selling you their property. The appraised value is 1,354,000 and he agrees to sell it for 1,254,000. I’m young without cash or equity and so minimizing down payment is crucial.

Could we list the sales price of 1,354,000 to the bank and carry a promissory note between ourselves for $100,000 (the difference between the agreed upon sales price and the sales price on the offer to purchase etc), and in the promissory note in addition to writing out the terms we put a silly clause that said that taking the friend out for lunch every week was a clause that would fulfill the primossy note. The thoughts here is to basically have a forgivable promissory note. The bank gets their 20% equity (I put the remainder of the 20% of the 1.354m down), the seller gets they want (1,254,000) and I was able to put $80,000 less.

Illegal? Fraud? Just taking advantage of getting a good deal? 

Any mortgage lender, at that value level, is going to require you to have some skin in the game. While having a seller carry-back 2nd is acceptable in most situations, they will require you to have at lease 5%, probably 10% of your own money into the transaction. They will review terms of the 2nd mortgage and will require full P&I payments, based on no more than a 30-year term, but would likely allow a 10 year balloon. The terms you suggest will not pass a lender's underwriting criteria.

Assuming the following, I don’t understand why the bank would care..

1) I have 10-15% of my own capital in

2) they have 80% LTV

3) debt service and all other relevant ratios are in good order 

If my note with the seller gets forgiven it only enhances the banks position. 

technically the seller has to try to collect on the debt other wise its income for them.. and they pay tax.. you may want your seller to talk to a tax professional so they don't get a surprise.

silent or forgivable seconds happen in the industry..

@Sam Simones
While it happens it is unethical and potentially illegal as you are using a silent 2nd to get you the 20% for the purchase price

Providing false and/or misleading information on a loan application is only up to a $1M fine and up to 30 years in the slammer

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