Despite being provided HUD settlement statements three days prior to a scheduled settlement, the buyers’ agent did not review those statements until two hours prior to the appointment. He immediately called to inform the escrow officer that the purchase price was low by $775. Asked if he had sent an addendum showing the new sales price, he replied that he didn’t know he was supposed to.
He was then informed that because the lender also was not given a copy of the addendum with the new sales price that the file would have to go back through underwriting. He was mortified. He explained that his clients had to settle that afternoon or lose the house. Then he called back to say that he was told it was ok for the buyer to pay the seller $775 outside of closing.
Hmmm… Why is this loan fraud?
Somewhere, behind the scenes of a loan transaction is a person or entity who is actually loaning the money for the purchase of the property. It’s their money and to protect themselves from making a bad loan, they hire an underwriter to delve into the ins and outs of the transaction. The borrower needs to be scrutinized and the property needs to be scrutinized.
Once the underwriter gathers all the facts, they are presented to the lender. Based on the purchase price, the loan amount, the appraised amount, the borrowers’ ability to repay the loan, etc. the lender makes a decision. If any of those details presented to the lender are actually false, the loan is then made on false pretense and therefore is consider loan fraud. All details of the transaction must be presented to the lender in a truthful manner. So, yes, $775 can equal loan fraud.
In this case, how could the problem have been avoided?
1- Real estate agents should send every addendum to the title company and to the lender immediately upon execution.
2- Real estate agents and loan officers must carefully review the HUD settlement statements with their clients immediately upon receipt. It’s why those statements are sent to them ahead of time in the first place.
FYI, in this case, the underwriter reviewed the file quickly and because the $775 didn’t put the loan-to-value ratio outside of acceptable limits, the settlement took place as scheduled. However, keep in mind, that on a very tight loan-to-value situation, a mere $775 could have cancelled the deal creating a mess for everyone involved.