This is what happens when the government dictates processes that should be determined by the real estate marketplace.
The post by George Souto is very helpful. We do need to keep the restrictions in mind when designing offers/counter-offers, financing alternatives, etc. That said, I believe that the regulators have gone too far, by far.
What is the percentage of sales where the below is clear????
"In reality what happens is the Seller raises the agreed upon Selling Price by the amount of the Closing Costs that they will be contributing."
Where is this documented??
Are the sales prices higher than list??
Was the list price low to encourage bidding?
What are the comparable SOLDs for this property?
I simply do not see buyers paying over list to cover seller paid closing costs for buyers.
The "checks and balances" are there.
There is a list price.
There is an offer.
There is a request for closing cost credit from the seller to the buyer.
There is an appraisal.
Unless the contract price is higher than the list price, what makes the practice of raising the price to "cover" seller credit so obvious. Even then, the market for that property would determine the value, not always the list price.
This was the "rationalle" for the government ending the Ameridream, Nehemiah, etc. programs. The government dictated what a seller could do with their own money (net proceeds).
The normal market forces of ask, bid, negotiate, accept/decline, process don't work when the government gets involved.
These days many of the FHA Borrowers that I work with require Sellers to pay most of their Closing Costs, so I need to be on top of what the FHA Guideline On Seller Paid Closing Costs are. The FHA Guideline On Seller Paid Closing Costs are very specific, but could cause some last minute surprises if not explained correctly, and understood by the Borrower.
FHA does not require that a Buyer put any of his or her own money towards Downpayment and/or Closing Cost. All of the money for Downpayment and Closing Costs can come from an acceptable gift source such as a:
- Family member
- Non Profit
- State Bonded Program like CHFA in Connecticut
FHA will not allow a Seller to contribute ANY money towards Downpayment, but they will allow the Seller to contribute up to 6% of the Sales Price towards the Buyers Closing Costs. This sounds good and it is, but I rarely see the Seller actually pay the Buyers Closing Costs. In reality what happens is the Seller raises the agreed upon Selling Price by the amount of the Closing Costs that they will be contributing.
This means that even though the Buyer can receive up to 6% towards Closing Costs, they should not request any more than the actual amount of Closing Costs that the Seller will be allowed to pay at the Closing. If the Buyer asks for more money than the Seller will be allowed to contribute towards Closing Cost, the Seller gets to keep the difference, and the Buyer ends up paying more for the house than they needed to. This means that before a Buyer or their Realtor asks for Seller Paid Closing Costs, they need to talk to their Loan Originator, and have him or her give them a very close estimate of what the Total Closing Cost will actually be.
In figuring the Estimated Closing Costs, the Loan Originator will need to take into account the Closing Cost that FHA will not allow the Seller to pay, and subtract them from the Total Closing Cost Estimate. The Closing Costs the will need to be deducted from the Total Closing Costs are any Closing Costs that are paid before the Closing. Those will include any fees paid to the Lender or other vendors prior to the Closing.
Possible items that maybe required to be paid before of the Closing are:
- Appraisal Fee
- Application Fee
- Condo Questionnaire
- Homeowners Insurance
There are other fees that could possibly be required to be paid before the Closing, but these are the most common ones. However, even though I have included Homeowners Insurance in the list above, there is away to include them into the costs that the Seller will contribute at the Closing.
All Lenders will require that the Borrower obtain an insurance binder before the Closing, but they do not require that the premium be paid prior to the Closing as long as a check will be sent to the insurance company at the time of the Closing. However, some insurance companies will not issue the insurance binder without a payment, so what I advise my Borrowers to do in that case is to just pay them one month premium, and the other 11 months paid at the Closing. That way they can maximize the funds that that they can receive from the Seller, and reduce their out of pocket cost.
I have heard of agree Buyers that did not find out until the Closing that they could not be reimbursed for the items that they paid before the Closing. That is not the type of surprise that anyone wants at the last minute. I make sure that my Borrowers understand this when I am Pre-Qualifying them, when I am doing the Mortgage Application with them, and after the loan is approved and they are now going to shop for Homeowners Insurance. I want them to take advantage of ALL the funds that the Seller has agreed to contribute, and I don't want an agree phone call from my Borrowers after the Closing.
This is something that can not be explained enough, and should be reinforced at every appropriate opportunity. FHA Guideline On Seller Paid Closing Costs are very clear, and need to be followed, because FHA does not provide any flexibility when it comes to this issue.
Who To Call For Your Mortgage Needs In Connecticut:
George Souto NMLS# 65149 is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 firstname.lastname@example.org, or visit my McCue Mortgage Homepage