Cash back from the builder/vendor – can I do that?

A builder is offering cash back if I buy his house – can he do that?

Cash Back!Builders (sellers, investors, etc.) frequently try to entice buyers into a transaction with cash back at closing, but in most (all) jurisdictions, it is a form of  mortgage fraud and won't fly.  Factually, while they might succeed getting you into a transaction, in reality the bank / mortgage lender will simply reduce the purchase price by the cash back amount, which will serve to increase your down payment requirements by the same amount.  The reason is that if the seller is willing to give you cash back, then they would be willing to sell at a reduced price.  So the real purpose of a cash-back offer is to entice/trick you into a transaction, which is not permitted and in fact illegal.

Example: a new home is offered to you at $249,900 with $10K cash back for furniture.  You expect your down payment of 5% to be $12,495. But when you go for mortgage approval you discover the lender/CMHC has reduced the purchase price to $239,900 (249,900-10,000) and is offering financing to 95% of the reduced purchase price, which equals $227,905.  Builder is expecting $249,900, so the shortfall is $21,995 which buyer is required to bring to the lawyer’s closing.  So you have gone from a down payment requirement of approx $12K to $22K - so much for the $10K cash back!  So what does the buyer do? Simply rewrite the purchase agreement with the $10,000 applied, so $239,900.  If the participants try to hide the $10k transfer in other paperwork other than the purchase and sale agreement, then both sides have committed mortgage fraud. In fact, when someone simply has “an intent to omit or mislead a party to facilitate a sale,”  such as with advertising, fraud has been committed.

If you do need money for property improvements (not furniture), there are "purchase plus improvement loans" where you can get quotes, do the improvements, then get reimbursed by the bank after the fact.

There are also "cash back at closing" products for furniture, etc.  where you pay a slightly higher interest rate and receive a up to 3% cash at closing.  But the general rule is that sellers cannot provide any kind of financing or incentive to intice you to purchase.

If you have some examples of cash back scenarios you've been offered or heard about, post them here and I'll comment back and analyze the offers for the benefit of all.

Topics: Buying a home, Down Payment, FAQ, Negotiating, Assistance Programs