2 Agent Misunderstandings That Can Ruin Your Transaction

Two of the more common mistakes I see on real estate contracts is   The use of escrow "allowances" such as carpet, paint, roof or landscaping allowances for the buyer after closing    Incuding personal property in the real estate transaction. The short answer is, neither of these is allowed by lenders.

Allowances / Holdbacks / Credits

The idea is, you'll buy my house from me, at closing I'll let the escrow keep $xxxx dollars from me for you to use on repairs to the house.

Just this morning I ran a search on the Spokane MLS for the word "allowance" and found 37 listings offering escrow allowances:

• Buyer to receive $10k roofing allowance w/acceptable offer at closing.
• $4,000 exterior paint allowance to buyer at closing.
• Up to $5,000 driveway allowance, paid at funding.
• With acceptable offer seller will offer $10,000 credit on HUD as a repair allowance to the buyers.

Seems fine and dandy, until you try and get your loan funded.  The loan underwriter will shoot this down faster and harder than Dick Cheney taking aim on a quail hunt. 

What we are NOT talking about is having the seller contribute cash toward the buyer's loan closing costs.  This is a perfectly legitimate and accepted practice from the lender's eyes.  What we are talking about is the seller leaving a credit, at escrow, for the buyer to make repairs to the house post-closing.  Let's see what the loan underwriting guidelines say...

From CitiMortgage Conforming underwriting manual, Section 806

Escrows for repairs on existing properties are not permitted

No sugar-coating here.  Note, escrows are allowed on new-contruction homes only.

From BB&T Mortgage Conforming Underwriting manual, Chapter 4:25

BB&T does not encourage escrowing for completion or repairs, However, if the improvements or repairs cannot be completed for valid reason, i.e., inclement weather or shortages of materials, funds may be escrowed

Seems fair, BB&T is willing to bend the rules for situations absolutely out of control of either buyer or seller.

Even FHA Underwriting Guidelines Page 1-8 Paragraph B of HUD document 4155.1 REV-5

Certain expenses... paid on behalf of the borrower, as well as other inducements to purchase, result in a dollar-for-dollar reduction to the sales price before applying the appropriate LTV ratio. These inducements include decorating allowances, repair allowances, moving costs, and other costs.

Aiy Aiy Captain!  No-can-do!

Why would a lender care about this?  If your house appraised for the sales price (or more), what does the lender care what the seller does with their money?  If the seller was feeling generous and wanted to leave a $100,000 credit for improvement to the new buyer, why is it the lender's business?

... continued... there is plenty more...

Such as:
A solution to leaving the buyer a credit at closing
Problems related to purchasing personal property in addition to the house you have under contract
A little wit and humor thrown in the mix (hey, why not?)

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Spokane real estate agent mistakes that can ruin your transaction

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