Home : Blogs : Janet Guilbault California Mortgage Banker : California Mortgage Advisor

Seller Credits: Playing Footsie Under the Closing Table Or Playing by the Rules?

Recently, a featured post told the story of an agent who decided to "SAVE" a real estate sale because the lender refused to allow a $7000 credit. He believed it was okay to exchange some funds under the table to solve this problem.

Ha! We knew better over here at ActiveRain. Just those words "under the table" sent shivers right up our collective spine.

The real estate business does not allow anyone to play footsie under the table with buyer and seller funds.

Should the agent have been in a position of "money laundering" $7000 that the seller owed the buyer?

No. Any mortgage person has the ability to calculate the allowable seller credit based on published lender guidelines.

In my opinion, all credits to the buyer need to be addressed before an offer is even written for 2 reasons:

Because they are directly tied to closing costs
Because they must conform to strict lender guidelines.

Five important points to remember about seller credits before an offer is written:

Credit can ONLY be used for CLOSING COSTS. Not for the down payment. Not for repairs to the house.
Amount of credit has a limit: Maximum allowed in most cases is 6% of the selling price.
Some lenders will only allow credit to be used for non-recurring closing costs. Some will allow for recurring (tax impounds, interest paid in advance, homeowners insurance, etc), as well as non-recurring.
Credit does not need to exactly match the amount of the closing costs, because anything "left over" can (and should be) be used to buy down the rate. There are limits to the amount of interest rate reduction you can buy.
A buyer cannot get CASH back if the credit exceeds the closing costs.

Five important things a buyer needs to know about seller credits:

By choosing a seller credit instead of a lower price on the house, you will pay higher property taxes(may not be true in all states, is definitely the case in California).
If your seller credit is large enough to allow you to buy down the interest rate, this can definitely be ADD TO YOUR ABILITY to buy a more expensive house. It will lower your payment more than it will raise your taxes in most cases.
THE HOUSE STILL HAS TO APPRAISE! If you raise the price by $20,000 to get your credit, the appraiser may not agree with you. The seller credit cannot be FLUFF added to the value of the house.
If you are only going to make offers on bank owned properties, your ability to get a seller credit is lessened.
Seller credits often become a negotiating tool. For this reason, making an offer requires that you already have a SOLID estimate of your closing costs (good faith estimate). This will dictate the final amount of cash you will need should the seller counter with a lower amount of credit.

Written by Janet Guilbault, Mortgage Banker/Broker based out of the San Francisco Bay Area

Ask Janet a question: jguilbault@rpm-mtg.com

Posted by Janet Guilbault California Mortgage Banker on 07/16/2009 01:05 PM

Comments (66)

Seller Credit in the Mortgage / Finance Channel

buyers, buyer incentives, smarter ways to buy real estate, real esate agent, writing offers

Originally posted at: Lucky In Lending: Seller Credits: Playing Footsie Under the Closing Table Or Playing by the Rules?

Generate short URL

Post is included in group: LOANS
Post is included in group: Northern California Real Estate Professionals
Post is included in group: Realtors®
Post is included in group: The Ninety-ninth Percentile
Post is included in group: Mortgages

66 Comments on Seller Credits: Playing Footsie Under the Closing Table Or Playing by the Rules?

JUL

2009

Excellent post with well written information for both the buyers and sellers on credits. Thanks for the information.

I had a client make an offer $7,000.00 below her max price and I told her to save the $7,000.00 for the close. She is coming in with about 60% down on a small purchase; yes it is an unusual situation. She was getting upset with me the other day at the cost of the closing cost. I then patiently explained it looked like the closing cost were going to come in under $7,000.00 and that it would save her about $80.00 per year on her property tax to start with. It took a lot of explaining, but she finally got it.

What I find interesting is she was OK paying more on the closing cost as long as it the seller paid it as a credit, even though she would have been paying it with a higher offer.

Gene: I think it is extremely hard for real estate buyers to grasp the complexities of credits to them. I find they are always (like your client) insecure about how the credit is being used....and if they are even getting the credit!.

This is where we as real estate professionals must really help them create a situation that flows smoothly, and gives them peace of mind.

Looks like you made that happen. Congratulations.

Thank you for the post. Great information!

Great follow up on the other post. Timely information. You have written this so even the beginner can easiley understand the process and the rules. Now they just to follow it!

A buyer cannot get CASH back if the credit exceeds the closing costs.

Janet

Please allow me to expound on this, just a tad. If the closing cost credit is 5000 bucks. And the closing costs and prepaids add up to 4500. The max CC credit is......ta daaaaaaaa 4500!

However, let's put it one more way...say the closing cost credit (which is typical in our area) is 2000 bucks! And the closing costs, prepaids etc...add up to 2500. Then, with the TAX PRORATE credit from the seller which comes over on the HUD anyway....means that they now have money COMING TO THEM from the closing...They typically cannot get back MORE than they put in! 500 earnest money, means 500 back!

Keep in mind, most GOOD REALTORS know that they must specify in the contract closing costs, prepaids, and whatever language your profession requires you to use! FUNDERS are now watching this too!

I liked your post this time alot! No fluff really, other than the word footsy! Another AR member actually put in HIS BLOG the words..."Disguising His Fees"...I wont say who he is, but he should be sharing a cell with the person who is laundering money!

Thanks! Darin

But I LIKE playing footsie......

Janet - With all due respect, don't listen to Darin too closely... word on the street is that he likes footsie:)

"In my opinion, all credits to the buyer need to be addressed before an offer is even written for 2 reasons:

Because they are directly tied to closing costs
Because they must conform to strict lender guidelines. "

Too make it pithy, you could of ended it there. Your opinion on this matter has an eerie resemblance to mine. Yet, you expounded and hit on so many relevant points that this makes this a must read (in my opinion) for any consumer, realtor, or loan officer for that matter.

There are smart ways to buy Real Estate, knowing the costs, credits, and what is why and why is where. I suppose that's where we come in:)

Janet - nice, thorough post on closing costs. Buyers always seem to have questions when it comes to what is covered and what is not. Thanks for a well-written post!

Janet, you are right. All the credits need to be out in the open and on "top" of the table.

How to lose your real estate license.

Play games with closing costs, under the table stuff, illegal use of seller credits, etc.

Buyers who are "marginally qualified" are the ones who are the quickest to default. A very high percentage of defaulted loans are audited these days. In fact, a higher percentage of loans are audited these days anyway.

Don't risk having a buyer file a complaint when they can't make payments or have an audit if they do default.

Keep your nose, your HUD-1, your contract, your GFE, clean and you will sleep just fine.

Great post and followed by some really helpful comments. As always Lenn comes in with succinct and helpful summary. I HATE secrets.

Fluff-o-meter: Using Footsie in the headline = 1 point

Using a suggestive picture in the post = 1 point

Using the word fluff in the actual post = 1 point

3 on the fluff scale.

A Banana: bookmark, or by all means call your favorite mortgage partner who has been forced to become an expert on lender guidelines just to survive.

Darin: you wrote:

Please allow me to expound on this, just a tad. If the closing cost credit is 5000 bucks. And the closing costs and prepaids add up to 4500. The max CC credit is......ta daaaaaaaa 4500!

What about using the last $500 to buy down the rate?

Tom: Hopefully not with your clients....

Jason: I was thinking of calling you because I haven't seen very many posts from you. Is that crazy girl from the West Coast distracting you? I figured!

I think the complexities of the mortgage business on all fronts require the input of mortgage people NOW more than ever. When I read the featured post I was suprised that more focus was not placed on avoiding the situation altogether, weren't you?

Hard to imagine it got that far.

Lenn: And keep everything in writing (use e-mail). I agree with you that the RISK is very high for anyone who decides they will "never get caught".

It absolutely is not worth it. I won't even answer questions about the $8000 tax credit. I tell them to ask their accountant. If they are not qualified, I don't want them to say "But my mortgage broker told me......."

ZZZZZZZZZZ that's me sleeping well at night.

Marian: Secrets and side deals....don't go there. No one deal is worth your license.

Kim: Buyers will soon have fewer questions because the good faith estimate will need to show whether each entry is paid for by seller or by buyer. Part of some new disclosure rules.

I am going to REPORT A CONCERN about you..because you knew something...wait...suggested something ...I didnt! because of YOU i am getting spammed by Shower Curtain companies from INDIA!!!

:) - D

Gary....or you are committing fraud. Ouch. I do not like the sound of that.

Darin: I am going to report a CONCERN about you because someone out there in a foreign country knows you like playing footsie in the shower.

That must explain you fascination with fluffy slippers.

Good data. Creative accounting worked for Enron and allowed some wall street guy to "Madoff" with billions! Worked for a while but then, ....

Also, it's ok if everyone else does it, we don't need "class action attorney's" anymore!

Buyers in our area seem to expect seller's assist these days, as if they are entitled to them.

Depends on my buyer, but i haven't had too many asking for closing costs with the way that they're competing with others for bank owned listings. It's amazing too, since if a seller demands you use their service provider for title and escrow, they have to pay for it or it's Respa violation.

and i have a shower curtain you can have for realy cheap too....

d&%$ spammers....all day today!

Amy: You have to admit the spammers are coming up with some pretty funny stuff. Here is my last one:

A typical statement by a court is that pencil designers of ordinary skill as of january had a bachelor degree in mechanical engineering and years of work experience designing pencils. Best regards :-(, Adiel from Niger.

LOL! I want to apply for a job as a pencil designer in Niger.

Top that one.

Erica: I have read where some Realtors blame mortgage people for putting this idea into the buyers head.

It is more of an issue now because first time buyers have so little cash and they are driving the market.

I can assure you they think of this themself without any help from me.

Jim Paulson...well I would put that poor agent who devised a way to save the deal in the same catagory as old Madoff. He was, however, being creative.

We talked about this in the office today, and none of us look good in orange. A Realtor in Oklahoma lost here license forever, had to pay lots of money in fines and attorney's fees, and went to prison for ONE check under the tasble that went from Realtor to Realtor account. The broker who did not know this was going on came within a hair of being lifetime banned. It aint worth it.

Good "post"-blog! A secondary blog with a cautionary tale!! Thanks! I always ask what the maximum the buyer can receive under the terms of their loan. Loan conditions change -- and are doing so rapidly! I rely on the lender to keep up on it, keep me apprised, etc. Good lenders will KNOW this stuff, and we just don't want to have any funds left on the table -- let alone under!! And I also like to suggest the buy down of points!! (Cute -- fluff points!)

Joe: Yeah, I don't think too many judges and juries are going to have sympathy for the mortgage/real estate people of the world.

Carla: I have to constantly monitor my fluff or Darin will take me to task.

I don't think Realtors should try to figure this out (Lenn, forgive me!) I think they should call up their favorite mortgage person, as you you have suggeste, and get the straight scoop on how much the credit should be in advance.

I left a little bit of money on the table when I was a newbie. It killed me and I beat myself up over it. I paid the borrower his money out of my commission, but never ever let it happen again.

School of hard knocks.

I love it when people explain things in a why I can easily understand. Super job and thanks.

Janet, I just reblogged this post because it is excellent. You did a great job. Thank you.

Great post! Thanks for sharing.

For those who like furry bunny slippers, please subscribe to the very discrete www.whatthehellishappeningwiththisinfluxofspam.com website.

Above average post, thanks for sharing:) Sardi from Bulgaria.

Actually Janet, if the seller is a relative they can contribute to down payment on FHA/VA purchases as gift funds....you just have to track it transparently. USDA has no problem with the seller contributing more than 6% if it 'makes sense'. But yes, I agree...the footsie thing needs some fresh air alright!

Hi An: That is what ActiveRain is about....learning and becoming better professionally. Thank you.

Lane: My friend, who else besides us writes about the car business? Thank you for the reblog, I am glad you found it useful.

Sardi from Bulagaria: I was advised by the raingods not to click on your link. But please send some fluffy bunny slippers in January so my degree in mechanical engineering will enhance my work experience designing pencils. PollyAnna Cotton Candy Fluff Bunny from Niger

Susan: I did not know you could exceed 6% with any loan. Thank you for sharing that information. Thanks also for bringing up gift funds....not a seller credit, but an allowed credit that has the same kind of limitations.

Great points.

Hi Janet -- As always, very solid advice. I totally agree. It's amazing how much confusion there is regarding this topic.

::Shivers:: just reading about non-disclosure. No, no.

Thanks for the post!

JUL

2009

J- I have to clarify for Loanetter. First of all, it is a BLOOD relative! It cannot be crazy uncle charlie from the local dive bar on the corner. Seller can also be a Trust/estate as well..and gift 25%, to avoid PMI altogether going conventional! see..im smart too! LOL...

The USDA comment is not correct...Sorry..but here's why...It is PARTIALLY correct...because, the USDA may not care! HOWEVER< DUE TO LENDER OVERLAYS, it may not MAKE IT TO THEM! If there is a FUNDER that will FUND a USDA loan over the normal GIFTED amount...I have yet to use them..and maybe I just need to HOOK UP!! Could be MY BAD on this one.. Plus, they dont care about tracking the money really...just has to be verified in the account! See..that sounds easy right?? NOPE, it still could be affected by Lender Overlays..Making a broad statement like that...sorry..it will confuse WAY too many people! Loanetter- Please do not take offense! I am not "cuttin" on you...I am merely making the point that there are exceptions to every rule, but when it comes to some of these..they are LENDER/and CUSTOMER situation specific!

Love- Yanni Toscani from Wisconi

Janet - I agree, everything should be on the table before closing. It's not worth the risk to run shady business. This was a great post.

Hi Jane,

You certainly know your stuff!

Your comment about "all credits to the buyer need to be addressed before an offer is even written... is right on in my book.

Great information. One thing to add is that 6% is typical but depending on the loan program, lenders have a requirement that the closing costs are associated with the down payment. For example is someone is putting 5% down, the lender may only allow 3% closing costs. Thanks for the post.

Keep in mind - You can also use closing costs to pay off items, such as collections. I've had to do this at times to get things closed.

I forgot - also - although a buyer can not get cash back that is directly the seller's money(credit/concessions), they can get their own money back for monies already spent (appraisal, survey, inspections, etc.) and have the seller's closing costs cover those items. Of course, assuming their required down payment per loan guidelines is met. I work with a lot of marginal transactions, so these tidbits make transactions out dead deals. :)

I guess you need a glass table in the conference room!

Joel

Not a good idea to do ANYTHING under the table. Transparency is the word.

There are still a few companies out there doing cash back after closing. It says on one of their websites:

You could use your rebate to:

Buy down points on your loan.
Pay for or lower your closing costs.
Buy new furniture with your rebate check! ---------------------

There are also new home builders occassionally offering deals like "no mortgage payments for 6 months" or "we'll pay a full year of your HOA dues"

These sound like footsie too, but somehow it's not under the table...

Closing costs have always been an issue to consumers. Trying to tell buyers the seller is paying something and they, the buyer, are not paying, has always bothered me.

Here is the way I see it. The final consumer of any product including a house pays everything.
If the buyer wasn't making the purchase there would be no exchange of money and nobody would be paid anything.

The buyer has one concern. How much money is coming out of my Account?
The Seller has one concern. How much money is going in my Account?

The Lenders and or the Government allow the Buyer to finance closing costs if they are written as Seller Paid.

Educating Buyers to the fact they are indeed paying everything no matter how the contract is written is hard and very unpopular, but if you do it, you will never have a problem with the Buyer or the Seller.
You can do a Buyer Net just like a Seller Net and it really help clear things up.

According to the rules in our state, post-closing commission rebates, by a real estate broker, to buyer/seller/lessor/lessee are perfectly legal.

The catch is that it must be done AFTER closing. So in other words, you can share your commission with anyone after you get it. You cannot offer it at the closing table DURING the transaction.

Also note that it must be done by the broker, not the agent.

Why you would give away your hard earned cash is another question.

Chris

Chris: I once had a loan screwed up by an agent who decided to give a $15000 rebate of his commission right before closing. This exceeded the allowable credits when it was combined with the seller credit.

I was VERY LUCKY to talk the lender (ING) into allowing this.

I am wondering why you would earn a commission, pay tax on it, then give it back to the client. And that it is allowed! Weird.

Dale, I do agree with what you are saying. However having enough cash to close a transaction is a different issue from understanding that a credit is not "free" money.

A seller credit is very useful because no matter what you pay for the property, a certain amount of cash needs to be coughed up one way or another.

Damon...buy down points is ok, it is a closing cost.

Pay for closing costs....okay as well.

Get a rebate for new furniture???? I can't think of any lender that would allow a rebate for new furniture.

Steve: Thank you for your input. I agree with what you said, and believe you bring up some excellent additions to this discussion.

I dont think you fully understood my post. I said that it is ALLOWED AFTER closing. And I agree, as I said before, why would you give up your hard earned cabbage. I just want to set the record as to what is ALLOWABLE. There is no RESPA violation for POST-CLOSING gifts.

In you 15k example, how is it a commission rebate BEFORE closing? Sounds like a loan, and a RESPA violation to me. Talking your banker into it could put YOU at risk.

Chris

Janet - This is great information and why it is so important for a buyer to get a GFE before making an offer.

Chris: It was a commission rebate pure and simple. He decided to give up that money to the buyers. I don't know why. He would not do it after the closing because he didn't want to be taxed on it, and then pay it. He insisted it be disclosed on the paperwork.

I am always above board with my lenders. I told them exactly what the Realtor intended to do and asked them how they would like me to handle it....even if it meant they would not complete the transaction.

I had already bought the rate down as far as I could, and used the seller credit which was the full 6 %.

Lender delayed the deal while they mulled it over, finally agreed to proceed (was a 1.4 million dollar transaction) and told me how to word it on the closing statement.

Natually I encouraged them to find a way to salvage the loan....if that counts as "talking them into it".

The funny thing was, the Realtor was mad at me for this delay. He couldn't understand why throwing more money into the mix should be a problem. Even at the last minute.

And I was thinking this "A lousy salesperson gives up their commission...what the heck?????"

Chris: It was definately not a loan. Borrowers had plenty of cash to close. I think however it could have been some sort of concession for something that might have occured during the transaction.

Just a hunch.

great post! it is ALWAYS wise to know the bank's handle on seller assist. it is important to not just get a preapproval BUT a gfe working in any seller credits expected BEFORE you start looking. i do this with my buyers and it works like a charm. i love my loan officer.

I have used the Seller concession to Buyer extensively, and I find that typically, closing costs run about 2% to 3% and the difference is often the cost of PMI premiums upfront, for example.

I've gone back over old transactions and every time, I've been able to verify that we could use every penny of three percent, if the Seller was willing to conceed to that amount. These days, however, banks are getting firmer on that, I notice, as the market has tipped back to a more favorable position for them (and I recgnize that other Sellers besides banks are agreeing to this, but banks are the largest contributor).

As a complete departure from this, and more to the Realtors than the lenders reading this, how are you all handling the banks (Sellers) who attempt to reduce your commission on the concessions to Buyers? I am currently preparing to file a formal complaint and request for disciplinary action against a brokerage who refused to follow the MLS rules against this, after two or more years of having commission reductions made unilaterally by banks. More on this later, perhaps?

Janet,

Thank you for this informative post. I especially enjoyed the "Five important things a buyer needs to know about seller credits" portion.

Janet, thanks again for the great post! I read this one, and the one previous to this one, that you were referring to. both were great and very informative. Thanks for sharing!

Of course I re-blogged it... and promoted it on FaceBook and Twitter...

JUL

2009

Ha...love the picture.

Yes, every penny spent and to whom is on the HUD statement . We can't hide what we got and where we got it.

Thanks for the post today.

Patricia AUlson/Portsmouth nh real estate

JUL

2009

Not to mention that if the sales price were reduced, and the loan amount reduced as well, the $7000 costs the buyer over $2,000 in additional interest over a 5 year time period and $18,000 over 30 years (based on 6% rate)

JAN

2010

Thank you SO SO much for writing this article!!!! My partner and I are first-time homebuyers, and just today decided to make an offer on a bank-owned property in Oakland. Long story short is that as we were meeting with our realtor to sign disclosures, write EM check, and make offer letter, we stumbled over some very confusing issues about seller credits--confusing enough for us to stop the proceedings until we can get a handle on it all. I found your article by googling "seller credit to buyer california," and it has been the clearest, most straightforward, most useful item I've read on the subject (and I've already plowed throught the mountain of books I've checked out about the process). Really, your post has been a great service to us laypeople out there just trying to claim a little piece of home in the craziness that is Bay Area real estate! Thank you again!

MAR

Great article. We're in escrow and are trying to figure out how to use a $12k credit from the seller for a new roof. Initially our bank (Wells) said it wouldn't be a problem. Now they say we can only use it toward non-recurring closing cost which will only be about half the amount of the credit. Thanks for explaining the details. I wish lenders could be held responsible for their bait and switch tactics.

Leave a response…

Name:

Email:
(optional)

Comment:

What does the graphic say?

Janet Guilbault California Mortgage Banker

Walnut Creek, CA

More about me…

RPM Mortgage

Address: 3201 Danville Blvd, Suite 195, Alamo, CA, 94507

Office Phone: (925) 552-3867

Cell Phone: (925) 212-6347

Email Me

Listings

Links

Archives

Find CA real estate agents and Walnut Creek real estate on ActiveRain.

Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.