Sellers can pay the closing costs for the buyer in many cases – however, just like everything else associated with getting a mortgage these days, you need to know the rules, to be sure the underwriters will accept it! Ignorance of the rules can turn a seller contribution to closing costs into a Catch-22.
Why is this important?
It can be the difference between a loan approval and a loan denial!
Seller contribution is a fancy way of saying a part or all of the closing costs are paid by the party that is selling the property. This could be a builder, a home owner, or the bank. For example, a seller could “contribute” or pay up to 3% of the real estate closing costs on behalf of the buyer. Simple, right?
If you are not working with a Real Estate Professional, you might not know how this should be worded, and negotiate a contract that says (for instance) Seller will pay $3000 in closing costs. Doesn’t seem like much of a difference on a $100,000 loan… right? 3% of the Sales Price is $3,000. However different loan programs have a cap on the amount the seller can pay – and at the last-minute, you could be required to pay more than you’d expected!
If the buyer’s loan program has a “cap” for “allowable” seller contributions is exceeded, that overage dollar amount is then called a seller concession. Seller concessions, as defined here, serve to reduce the buyer’s loan amount dollar for dollar!! So working with a professional, can DEFINITELY help a new buyer avoid a potentially difficult last-minute rush to find the additional cash needed to close!
For example, say you want to buy a $100,000 home and you have 5% down payment and not a penny more. The standard FNMA guideline at 95% only allows for a 3% seller contribution toward costs.
Let’s also assume you qualify for a $95,000 loan and not a penny more.
The loan is structured as a $95,000 conventional loan that allows for 3% in seller contributions which the seller agrees to pay. The 3% equals $3,000 but you discover the total real estate closing costs are $3,500!
Where is the extra $500 going to come from? You don’t have it. You can’t raise the loan amount based on our assumptions. It’s got to come from the seller, right?
According to program guidelines, 3% is the maximum contribution and any extra would be classified as a concession reducing the loan amount and still requiring you come in with $500.
There’s the Catch-22…sellers cover costs to close the deal with cash-strapped buyers…but give too much, and the “Sellers self-serving generosity” can actually kill the deal.
In the real world, there are solutions about 99% of the time. But I added this scenario just to illustrate how not knowing the Catch-22 in the underwriting guidelines can cause real problems.
If you have questions about purchasing a home and qualifying for a FHA mortgage loan in NC – please call Steve and Eleanor Thorne! 919-649-5058. We offer the best First Time Home Buyer Programs available at the Best Rates in Raleigh! We also work with the TOP Real Estate professionals in NC, and would be glad to refer you to someone who knows how to structure a contract with the Seller Paying Closing Costs!