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:

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

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

1. Credit can ONLY be used for CLOSING COSTS. Not for the down payment. Not for repairs to the house.
2. Amount of credit has a limit: Maximum allowed in most cases is 6% of the selling price.
3. 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.
4. 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. 
5. A buyer cannot get CASH back if the credit exceeds the closing costs.

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

1. 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).
2. 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.
3. 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.
4. If you are only going to make offers on bank owned properties, your ability to get a seller credit is lessened.
5. 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