Real Estate Council of Alberta Fundamentals Practice Exam

What might a lender mistakenly do in a Vendor Cash Back scheme?

1. Approve a loan based on the real sale price

2. Underestimate the risk of fraud

3. Use the inflated sale price for mortgage approval

4. Negotiate a cash-back agreement

The correct answer is: Use the inflated sale price for mortgage approval

In a Vendor Cash Back scheme, a common mistake a lender might make is using the inflated sale price for mortgage approval. In such schemes, the vendor offers cash back to the buyer after closing the sale, which can lead to discrepancies between the reported sale price and the actual value of the transaction. When lenders base their mortgage approval on this inflated sale price, they risk providing financing that exceeds the property's true market value. This miscalculation can result in higher loan amounts that are not justified by the property's worth, increasing the risk for both the lender and borrower. Understanding the implications of using an inflated sale price is crucial for lenders, as it can affect their risk assessments and lead to potential financial losses. Rather than accurately reflecting the deal's true nature, relying on the inflated price may also contribute to market distortions and can invite fraud if not properly scrutinized. Ensuring accurate assessments of property values is vital in the lending process to mitigate these risks.