Expert: liznarr - 8/31/2007

Question
Hello.  I am selling my house.  My friend works at a mortgage brokerage and I would really like him to be able to do the loan for whomever decides to buy my house.  I don't want to force anyone into using him, but he does a good job and I think it would be in my best interest to have someone I know be involved in that part of the sale.

I have seen other sellers offer sums of money towards closing costs in their listings IF buyer uses their "preferred lender".  These are private sellers - not builders or industry people.  Is that legal?  I have heard people talk about steering and conflicts of interest, etc. I want to do the same (I plan on offering some credit anyway) but wanted to make sure I am not going to be opening myself up for uneeded liability.  

Thanks!

Answer
Hi Chuck,

Interesting subject you have brought up.  Builders, mainly, use this practice VERY frequently.  The million-dollar question is, is it legal?  I have never received a clear-cut answer on this, even from an attorney.  I’m not saying there is no clear-cut answer, but I’m saying that I am just not aware of a definitive case of right versus wrong on your question.

What I do know is this:  Parties to a Contract of Sale can agree to anything they want, so long as there is no illegal use or end.  So, if a purchaser wants to use a builder’s (or Seller’s) preferred lender and receive extra credits toward closing costs, this appears to be legal and happens frequently.

The question, however, has come up … has a builder then crossed the line if a purchaser still asks for closing costs to use the PURCHASER’S preferred lender, and the builder or Seller refuses?

I wish I had a “yes” or “no” answer for you, but I do not.  Perhaps you could consult with an attorney in your area and ask this question.

There would be both pros and cons of asking a buyer to use your friend who works at a mortgage brokerage.  The pro would be that as long as everything goes fine, everyone is a happy camper.

But … what if the Purchaser has bad credit, has a marginal beacon score, or some previously unknown fact rears its ugly head shortly before closing … and the closing is delayed or never happens?  Think about it:  You might likely blame your friend for something he could not control, and the friendship could suffer irreparable damage.  

Then there is always the possibility that you have a ticked-off Purchaser who thinks YOUR lender cost him time, money, and/or a home purchase and considers litigation because … at this point, the Purchaser has everyone telling him so-and-so could have approved the loan quickly and closed the transaction.

You’ve heard the old saying, no doubt, that whenever possible, never conduct business with family or close friends?  That’s a very true adage, and those words run deep.  If your friend is as good at the mortgage lending business as you say, your deal will neither make nor break him – and you do not put your friendship at risk.

What you might consider is offering “X” amount toward closing costs with the stipulation that you must approve the lender the Purchaser names, or no allowance will be given toward Purchaser’s closing costs.  This way, you can approve or disapprove the PURCHASER’S choice of a lender, and should the deal head South, your friend is out of the picture and the friendship is preserved.

Good luck to you.  I’m sure you will make whatever decision is right for you.

Regards,
Elizabeth