Oops, I committed mortgage fraud!

As house prices fall and buyers exit, some sellers become desperate to strike a deal. Alas, this particular pact is dodgy...

As house prices suffer the biggest drop since April 2009, and buyers pull out of deals, desperate developers and sellers are trying all kinds of tricks in order to make deals go through.

For example, some developers are offering to pay a buyer's deposit and stamp duty, legal and removal fees, and so on. These kinds of ‘no fees' or ‘cashback' promotions are becoming increasingly widespread as sales fall off a cliff.

However, there are some things you cannot do in order to pull off a desperately needed sale. In particular, you should not mislead a mortgage lender about your sale price and the deposit put down.

A bung beckons...

For instance, let's say that you've been trying to move house for nearly a year, having lost several buyers along the way. Fortunately, your latest buyer has agreed to pay close to your current asking price of £100,000, so your move is back on once more.

Alas, a snag arises when your buyer tries to get a sufficiently large mortgage. He has a deposit of £5,000 (5%), so he needs a mortgage of £95,000 to buy your property. The problem is that, despite searching the entire market, his mortgage broker is only able to find a lender willing to lend him £85,000, or 85% of the purchase price.

Although your buyer is keen to proceed, he can't make up the difference, so it looks as though your property chain will collapse yet again. Desperate to hang onto him, you invent the following plan:

•         You up your asking price to £111,765.

•         Your buyer borrows £95,000, which is 85% of the higher sale price.

•         Taking his £5,000 deposit into account, he is now £11,765 short.

•         Generously, you pay him this £11,765 as an incentive or ‘cashback' to do the deal.

So, you don't end up out of pocket, and he gets the house he wanted. So, everyone wins, right?

In fact, not everyone wins, because the mortgage lender funding the purchase has been misled. Instead of lending £85,000 on a house selling for £100,000, it has now lent £95,000 on a £111,765 purchase price. Indeed, although this sounds like a clever way of bringing a deal back to life, it amounts to mortgage fraud. This is because the lender is being misinformed as to the actual price being paid.

Think about it like this: the lender believes that it is lending £95,000 and your buyer has a deposit of £16,765. Thus, it is comfortable, as this meets its 85% loan-to-value limit. In fact, the buyer is only putting in £5,000, with you making up the remaining £11,765. Thus, the buyer has only put in a 5% deposit (£95,000 of the £100,000 paid), not the 15% required by the lender.

Why does it matter where the deposit comes from? The answer is that a buyer putting in £16,765 of his own money has more to lose than when he deposits £5,000. Thus, the £11,765 bung masks the buyer's true risk profile and misleads the bank or building society.

This deal should fail because the buyer's solicitor is obliged to report the cashback payment to the mortgage lender, causing it to reduce or withdraw its offer. A lawyer failing to do this would probably be barred from the lender's panel of approved solicitors. Indeed, he could face misconduct proceedings by the Law Society, and even be prosecuted for conspiracy.

Can we do a deal privately?

On the other hand, you might decide to ‘cut out the middlemen' by agreeing a sale at £100,000, backed by a short-term, upfront loan of £10,000 from you to the buyer. This loan, agreed ‘on trust', is made without informing any of the third parties. So, before the sale, the buyer hands over the required £15,000 deposit to his solicitor, who is none the wiser. After completion, he returns the £10,000 to you.

Of course, there can be no written agreement to back this private arrangement. Thus, if your buyer chose to keep the £10,000, you face a shaky court case to get it back. What's more, he might decide to take your ten grand and run, leaving the sale to collapse! In any event, this kind of artificial scheme would still probably amount to mortgage fraud.

In summary

Although you might be able to get away with this kind of desperate action, there's a lot at stake. In fact, you could face trial, a criminal record, and even imprisonment. Hence, if your house isn't selling for whatever reason, then clearly the price isn't right in today's market. Sadly, unless all participants agree to take a haircut, then your sale could fall through and the upward chain collapses.

This real-life drama and thousands like it are being played out in estate agents across the country.

Nevertheless, when times are hard, the only sensible option is to cut the price in order to do the deal. Any artificial manoeuvres are likely to fail, leaving you back to square one, so the best thing is to be honest and play it straight. Accidentally or otherwise, you don't want to commit mortgage fraud, do you?

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