Explanation of Settlement Costs
To show the affordability of homes and how the tax credit can actually put money back in a first time home buyers pocket I took a few recent closings so we can look at actual true-life scenarios. I have attached the estimated closing costs for each property both with a seller assist and without a seller assist all except for the case of 1105 Society Place as this property did close with a 6% seller assist so I found no reason to run a different scenario.
1105 Society Place is a 2 bedroom 1 bath condo in Newtown Grant that settled for $190,000 on 2/26/09. The MLS sheet shows the buyers received $11,400 as a seller's assist towards closing costs. However, since a seller assist cannot exceed the buyer's closing costs, and under FHA guidelines the buyer must pay for the 3.5% down payment I had to lower the seller assist by almost $2,000 to $9,490.15 for this example. You will notice the settlement cost estimate includes the breakdown of all of the fees included in buying a new home, but for our purposes the two important sections to focus on are at the bottom of the page under Funds Required to Purchase and Monthly Mortgage Payment (PITI). You'll see with a seller assist of $9,490.15 the buyer only needs $6,650 to purchase the home and the monthly payment including principal, interest, taxes, mortgage insurance, condo fee, and homeowners insurance (estimated at $300 per year) your monthly bill comes to $1,454.67. Not too bad considering it would cost approximately $1,300 or so to rent a similar unit. So, at settlement the buyer must bring $6,650 to purchase their new home, but next year when they go to file their taxes they will apply for the First Time Home Buyer Tax Credit which in this scenario will equal the full $8,000 so in essence they have actually purchased a new home and put $1,350 back in their pockets. Pretty amazing!
In this scenario I reduced the seller assist the buyer actually received since the buyer must pay the 3.5% down payment, but this does not mean the seller assist wasn't $11,400. In a situation like this when the seller assist exceeds the buyers closing costs the buyer has a couple of options. They can use the additional funds to pay for points to reduce their interest rate, or they can ask the seller to reduce the sales price. In this scenario I did not use the extra money at all as I am not privy to what actually transpired.
Now let us look at a townhome in case a condo just isn't right for you. 156 Madison Ct. settled for $207,000 on 10/29/08. There have actually been a few good deals in this neighborhood one selling for $200,000 that needed a bit of work and one at $213,000 that was completely move in ready. The buyer did not receive a seller assist on this property, but a buyer could have easily received a seller assist and had the seller still net their bottom line of $207,000 without any concerns of an appraisal issue. I have attached both scenarios with and without a seller assist to show you how they would both play out. We will focus on the one with the seller assist for our purposes here. You'll see with a seller assist of $11,722.15 the buyer only needs $7,630 to purchase the home and the monthly payment including principal, interest, taxes, mortgage insurance, condo fee, and homeowners insurance (estimated at $800 per year) is $1,645.25. Not too bad considering it would cost approximately $1,500 or so to rent a similar townhome. So, at settlement the buyer must bring $7,630 to purchase their new home, but next year when they go to file their taxes they will apply for the First Time Home Buyer Tax Credit which in this scenario will equal the full $8,000 so in essence they have actually purchased a new home and put $370 back in their pockets. If you compare the two scenarios one without the seller assist and one with the assist the monthly payment including all taxes, insurances, and homeowner fees the difference is only $62.85 rolling the $11,722.15 seller assist in. Considering cash is king it's interesting to see that it would take 15.5 years for the additional monthly payment of $62.85 to equal the $11,722.15 rolled into the mortgage. Since most people won't live in the same house for 15 years it's not a bad idea to role the settlement costs into your mortgage even if you don't have to. Instead, you could use that money to upgrade a kitchen, or bathroom to increase the value of your new home. Not too bad!
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