How Cash Back at Closing Works

Cash back at closing schemes have been the cause of many of the foreclosures happening today. Ralph Roberts of ralphroberts.com describes it like this...

Here’s how a cash-back at closing scheme works: The buyer pays more for a property than it’s worth, and the seller agrees to kick back the surplus cash to the buyer at the closing. On its surface, cash back at closing seems to benefit everyone involved. The buyer pockets some extra cash. The seller unloads his house at or near the asking price. The real estate agent gets a bigger commission. The loan officer chalks up another successful loan. And the lender stands to earn more interest over the life of the loan. Everybody wins. Or so it seems.

Unfortunately, as with most deals that seem too good to be true, cash back at closing schemes are just another way of scamming someone-in this case, the lender, who’s fooled into loaning more money than the collateral used to secure that loan is worth. If the borrower defaults on the loan (which is almost a sure thing in cash back at closing schemes), then the lender can’t recover the money by selling the property.

Cash back at closing also:
1. Inflates housing values, making housing less affordable.
2.Artificially raises property taxes.
3.Stimulates foreclosure and destroys neighborhoods that begin to buckle when homeowners default on the inflated loans.

With cash back at closing, what may have seemed like a win-win situation leaves plenty of losers in its wake.