The sellers, buyers and Realtors involved in real estate sales seldom set out to commit loan fraud but apparently many unwittingly do. It is not uncommon for the loan officer to say that negotiated repair credits can not appear on the settlement sheets..that they must be handled outside of closing. However if the seller hands the buyer a check for these repairs after closing they have just committed loan fraud. The buyer is receiving monies from the seller that has not been disclosed (in writing) to the lender. This is illegal and pervasive. Depending on the regulatory agency involved it can be a federal offense. The potential consequences can be jail time (potentially in a federal jail), fines and in the case of the Realtor, loss of their license and livelihood.

Often, instead of a repair credit, buyer and seller will negotiate a credit towards allowable buyer's closing costs. In effect the buyer gets the benefit of lower closing costs and should have the money in their pocket to make the repairs after closing.

According to Oliver Frascona, a Colorado real estate attorney this is fine as long as the lender receives the inspection notice, and all the amendments that are a part of the contract. If you don't give them these items you are intentionally concealing a material defect in the property.

Often the loan officer or loan underwriter does not want to see these items, as there may be inspection items that the buyer has requested, that the underwriter will want repaired prior to closing. This is particularly true if the type if loan the buyer is getting is an FHA loan. However according to Oliver Franscona these items are a part of the contract and by not giving them to the lender loan fraud has been committed.

Many lenders I have talked to indicate that they do not require a copy of the inspection notice in the general course of their business, but the inspection notice is a part of the contract. The lender may not want to have the inspection notice and amendments in the file but it is the Realtors, buyer and seller that will be in trouble if the loan is subsequently investigated.

The lenders want to make the loan, the buyer wants to buy the home, the seller wants to sell the home and the Realtors wants to make the commission. These issues come up late in the transaction generally just a few days before closing, after the buyer has given notice to their landlord, the seller has moved or purchased another home. Perhaps the seller is behind on their payments. There is a lot of pressure to handle the issue outside of closing and get it closed. Generally there is no consequence, unless the buyer fails to make their first payments. If those payments are not made the lender will pull the file and look for any wrong doing. If it is an FHA loan the FBI could investigate. The agents involved can expect that not only will they look at this transaction but also they could investigate all the transactions they have done over several years looking for a "pattern of behavior".

If your home is likely to sell FHA, be prepared to take care of any health and safety issues before closing. If there is an inspection issue that is likely to be costly to repair the lender may require it repaired prior to closing so that the buyer does not have a major expense immediately upon moving in. Be prepared to get it taken care of. Your Realtor can tell you what issues are likely to be red flags.

As a buyer talk to your lender to see if the carpet/redecorating allowance that you are negotiating will fly. Do this before you write the contract. If you switch the carpet allowance to a closing cost credit, be aware that if the final closing costs are less than the carpet allowance you cannot legally get the difference.

Lenders have rules they must live by set up by regulating agencies. FHA loans have the HUD guidelines. Convention loans have Fannie MAE or Freddie Mac guidelines. These guidelines establish buyer loan qualification with regard to income, credit, and down payment terms. Any arrangement that gets money into the buyer's hands that is not disclosed to the lender in writing can be loan fraud.