Squeeze Every Dime From a Seller Credit to Buyer Closing Costs
Due to the new regulations proposed by Trump for FHA loans, borrowers could find themselves limited in the amount they can receive from a seller credit to buyer closing costs. Since many loans in Sacramento are FHA loans, that can cause a problem for cash strapped buyers. See, the thing is many first-time home buyers can afford to pay a hefty mortgage payment, but they don’t always have enough reserves to pay closing costs.
It is not unusual for a seller to negotiate paying part or all of those costs for the buyer. This seller credit to buyer closing costs is often figured as a percentage of the sales price. Before Trump, that amount was 6% for FHA, but it’s likely to be reduced to 3% of the sales price. However, before you start jumping for joy and grateful it wasn’t eliminated all together, be aware there are several things that can go haywire.
Low Appraisal Can Erase a Seller Credit to Buyer Closing Costs
For starters, often a seller will increase the sales price to accommodate for the closing cost credit. In other words, if a seller listed a home for $300,000, a buyer might offer a seller $310,000 and ask for a 3% seller credit to buyer closing costs, which would give the seller an effective price of $300,700.
If it appraises. That is the kicker. If it doesn’t appraise, the seller could find herself netting $291,000, if the maximum appraisal amount is the sales price. It can backfire. Further, the seller is free to cancel and is not required to lower the price for a low appraisal.
What if the Closing Costs Are Less than the Seller Credit?
Sometimes the seller credit to buyer closing costs is negotiated after a home inspection, and the buyer finds a bunch of stuff wrong and wants it fixed. Instead of fixing the defects, sometimes a seller will offer a buyer a credit instead. Since the lender will not allow a credit to repair a defect, the credit is instead applied toward closing costs. The reasoning is the money the buyer would have used for closing costs can be saved for repairs. Not so fast, though.
Part of the problem with this approach is sometimes buyers think they will receive the full credit. For a home selling at $300,000, that would amount to 3% of the sales price or $9,000. If the buyer’s total closing costs do not add up to $9,000, there is a problem. Say, the closing costs are only $7,000. That means the $2,000 the buyer expected to receive stays in the seller’s pocket. The buyer can lose that extra money.
How Agents Can Protect a Buyer’s Closing Cost Credit
The smart thing for any agent to do is to call the buyer’s lender when the closing cost credit is negotiated. Don’t reply on an addendum or other paperwork that could be misread or misfiled. Call the mortgage loan officer and make sure the lender is aware and recalculates the closing costs. There are ways to stretch the costs to cover all of the credit from the seller so the buyer doesn’t lose any of that money. Just don’t wait for the last minute.
Smart buyer’s agents are always thinking ahead and coming up with ways to avoid problems down the road for their clients. This is one of those situations that needs close monitoring. It’s better to be safe than sorry. Don’t always assume somebody else will do their job. They don’t always. They let you down. Lenders make mistakes. So be proactive.