Mortgage Blog

Mortgage It Right!

Know Your Risks re Creative Financing

October 21, 2014 | Posted by: Kelleway Mortgage Architects

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I presented recently at a breakfast for realtors prior to their MLS Tour in Coquitlam, BC.   One realtor raised the topic of using “abatement” as a means of creative financing.

Sometimes well-meaning realtors want to help their buyers by creating down payment funds by means of abatement whereby the seller gives cash back to the buyer upon closing.  Here’s the good, the bad and the ugly of attempting that form of creative contract writing.

The seller acknowledges on an addendum to the buyers that the property has deficiencies.

The addendum with the abatement bypasses the lender during the mortgage application process but arrives at the lawyer’s office.
The conveyance (law office) informs the lender of the abatement.
Lenders often view abatements as cash kick-backs from sellers to buyers that artificially inflate the selling price of the property.

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The lender can choose to do the following:
1)   Let the abatement go through – highly unlikely!
2)  Reduce the property value for funding purposes (i.e., The borrowers are approved for less mortgage money but the selling price remains the same.  Therefore, the buyers have to come up with a higher down payment at closing – often causing stress for everyone involved!).
3)  Delay closing and/or hold back funds until the buyers provide estimates for fixing the deficiencies.  After the work is complete and verified, the lender later releases funds.
4)  Refuse to proceed with the mortgage and buyers are left scrambling for alternate funding or else lose their deposit!

Would I Recommend Abatement as a Creative Financing or Sales Strategy?

If the abatement is being done to create additional down payment funds for the buyers – don’t do it!

If the purpose of the abatement is to supply funds to buyers to fix deficiencies, or even customize the home to their taste, use another strategy called “Purchase + Improvements.”  The realtor then negotiates the best purchase price for the buyer. And, neither the realtor nor the seller gets involved in giving cash back to the buyers to cover the cost of fixing deficiencies.

“Purchase + Improvements” financing allows buyers to wrap up to $40,000 plus into their mortgage right at closing so they can have property improvements completed, perhaps even before they move in.  The buyers get a pre-approved budget and are responsible for paying for improvements upfront. The lender holds back additional mortgage funds based on an “as-improved” value of the property until the work is complete and verified, usually within 90 days of the closing date.

I have arranged many “Purchase + Improvement” mortgages over the past 12 years.  If you would like to know more on how this works, please give me a call.

What's the Next Step for You?
1)    Keep us in mind and on hand in case anyone you know runs into the same sort of situaltion.
2)    Share this post with your friends and family because you never know when the info could come in handy.
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Glen Kelleway, BSc, AMP, Senior Mortgage Planner & Owner
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