Is this legal?

[Account Closed]

Could someone describe to me how down payment assistance works? I saw someone advertising they needed down payment assistance funding.

The purchase price was $2.5 mil, the mortgage was $2.0 mil and the DPA was $500,000 with $50K additional wired back the same day. How is that possible?

[Jon Holdman]

We dug into this a while back. Nobody claimed to have actually done such a transaction, so there was no direct experience. But here's a summary of the what the process appears to be.

Say you've found a place the seller will take $2M for, but that will appraise for $3M. Your lender says they will do a 70% LTV loan. You inflate the purchase price to $3M and write a contract for that price. The lender agrees to the price, and agrees to lend you $2.1M You borrow $900K from the DPA lender. At closing, the DPA lender wires in the $900K and the real lender wires in $2.1M. The seller is paid $3M (ignoring costs here). The transaction is closed. now, the seller wires $945M back to the DPA lender. That's their $900K plus $45K in fees. I don't recall the fees, but they were hefty. The seller gives the remaining $55K to you.

You'll have to have a lender who doesn't care about seasoning on the down payment. Some will want to see that you have the money on hand, or at least understand its source.

As to whether this is legitimate or not, there was a lot of debate. I'm not sure we ever came to a final conclusion. For a residential loan covered by the RESPA rules, this would be loan fraud. But those rules don't apply to commercial loans. So, maybe it OK. Maybe not. Consult a lawyer if you want a more definitive answer.