What an Underwriter does NOT want to see when viewing Chicagoland Real Estate Contracts

Mortgage and Lending with NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 IL Lic 031.0006220/WI


What an Underwriter does NOT want to see when viewing

Chicagoland Real Estate Contracts


      Recently, I've seen some repetitive scenarios popping-up on my mortgage clients' Sales Contracts, as they pertain to "concessions" and property repairs.  Several of the transactions I've seen have had Home Inspection issues arise.  Each time this has set-off the back-and-forth of timely negotiations.
     I think it's important for clients to understand that ... from an Underwriter's viewpoint ... the ONLY allowable Seller-paid concession on a Sales Contract is for Closing Costs anContact info for Gene Mundt, Mortgage Lenderd certain pre-paids, such as Interest, Homeowners Insurance, and Escrow Deposits.  

     In other words, credits or escrows established and intended for "future" repairs to be made by new Buyers are not allowed WITHOUT effecting the Sales Price, Appraisal, and Loan Transaction.
     Lending Guidelines state:  Contract clauses or Riders or Addendums that reference a "Repair Credit" must be treated as "Price Concessions" and are to be DEDUCTED from the Sales Price dollar for dollar.


     To better illustrate this Lending Guideline, consider the following scenario: 


     A house sells for:  $305,000
     But the Home Inspection, made after the Sales Contract has been signed, revealed that a home repair costing $5,000 needed to be made.


     If written into the Sales Contract ... or the Contract is amended this way, the loan amount consideration (% of Down Payment) now has to be based upon $300,000, not the original Sales Price shown above.


     This changes the Borrowers' cash position in the following way:
$305,000 Sales Price
20% Down = $61,000
Loan Amount  = $244,000
BUT ...


     Guidelines state that the Loan Amount has to be capped at $240,000  (to avoid Mortgage Insurance) , ( the amount representing 80% of $300,000, the Contract amended price.)  So in effect, it's as though the Buyers and Sellers agreed to a Sales Price of $300,000 and no Credit was being shown from the Seller.


     However, if the Sales Contract had been written to contain the following: "$5,000 Closing Costs Credit from Seller to Buyer at Closing" ... the original Sales Price of $305,000 WOULD be allowed and unaffected.  The Buyer would just receive the $5,000 Credit at Closing time, which would reduce their overall total cash needed to Close.


     The math equation for this is ... Down Payment plus Closing Costs minus any Allowable Credits.


     My advice when these situations occur is this:  Write these Sales Contracts with Seller-paid Closing Costs factored in, if at all possible.  Especially if you are concerned that there may be property condition concerns that arise.  Issues that might raise a red flag?  The sale is an older home.  The property has a worn roof.  There's suspicions of mold or more obvious disrepair or defect, etc.


     I understand that Chicagoland Brokerages have their own method of writing these Sales Contracts.  And in those instances, I recommend that you follow your Brokerage Policies after you have spoken to Legal Representation that may be involved within the transaction. 


     What an Underwriter does NOT want to see when viewing Chicagoland Real Estate Contracts ...  While all the above may seem to be a simple matter of semantics, rules are rules and Guidelines must be followed. Not structuring the Real Estate Contract in the right manner can cause a deal to be unsalvageable ... or at minimum, cause delays in the process.   And none of us want that ...
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Gene Mundt

 Mortgage Originator  -  NMLS #216987    

                                 IL Lic. #031.0006220  -  WI License #216987                                                                                                    

NMLS #175656


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Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

This s a very confusing issue.  I have had lenders simply tell me "don't ask don't tell"....  Also, appraiser in my neck of the woods substratct the concessions for closings costs, but they are not reported in the MLS.  It is definately not a clear issue.

Jun 26, 2013 01:03 PM #12
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Gene, we counsel our buyers to ask for closing costs instead of credits for repairs. It's as you say, much cleaner and understood by underwriters. Occasionally there is an escrow situation, but we try to avoid that if at all possible. Sharon

Jun 26, 2013 02:32 PM #13
Margaret Rome, Baltimore Maryland
HomeRome Realty 410-530-2400 - Pikesville, MD
Sell Your Home With Margaret Rome

Just closed a property that was asking for $10,000 in closing for an AS IS property. Could not get the loan without some repair so the closing costs were forfeited for repairs.

Jun 26, 2013 03:02 PM #14
David Shamansky
US Mortgages - David Shamansky - Highlands Ranch, CO
Creative, Aggressive & 560 FICO - OK, Colorado Mtg

LOL sounds like you have hit this more than once to cause this blog post to be created! The best part is you are 100% correct, any time its for repairs or the like you are in the same boat as the appraisal coming in for 5k less if you want it now you gotta pony up the 5k ON TOP of your down payment!!!

Great post Gene

Jun 26, 2013 03:10 PM #15
Jeff Dowler, CRS
Solutions Real Estate - Carlsbad, CA
The Southern California Relocation Dude

This comes up as a possible issue in many situations where the home is not in pristine condition but you find out after the home inspection that there are issue. In this changing market this seems to be less of an issue as buyers are willing to take the property anyhow, and sellers, with multiple offers, know they don't have to negotiate further

Jun 26, 2013 03:50 PM #16
Gita Bantwal
RE/MAX Centre Realtors - Warwick, PA
REALTOR,ABR,CRS,SRES,GRI - Bucks County & Philadel

Thank you for the great post. I will bookmark this and share with others.

Jun 26, 2013 08:17 PM #17
Nina Hollander
Coldwell Banker Residential Brokerage - Charlotte, NC
Your Charlotte/Ballantyne/Waxhaw/Fort Mill Realtor

Gene... we've seen this come up on older homes in Charlotte, as well. Mostly we deal with it by having seller pay for repairs (not provide any credits or concessions), even if they pay out of closing proceeds.

Jun 26, 2013 10:08 PM #18
Sally K. & David L. Hanson
EXP Realty 414-525-0563 - Brookfield, WI
WI Realtors - Luxury - Divorce

Agents with experience know those guidelines....and are ever watchful during both inspections and subsequent amendments...newbies are unaware what de-railing this can cause...it should be in Realtor 101..it's not...it is from the school of experience.

Jun 26, 2013 10:22 PM #19
Tim Maitski
Atlanta Communities Real Estate Brokerage - Atlanta, GA
Truth, Excellence and a Good Deal

The biggest problem is when you negotiate the closing costs upfront because you know that you need them.  Then it limits how repairs can be negotiated.

Jun 26, 2013 10:23 PM #20
Corinne Guest
Corinne Guest, REALTOR® | Barrington Realty Company - Barrington, IL
Barrington Lifestyles

I think this would be well read and absorbed by our attorneys as they commonly come along and negotiate credits for repairs after inspections without a thought for how it might affect the buyers mortgage.  Many buyers want the credit rather than repairs so they can hire their own contractors. Great post as usual.

Jun 26, 2013 10:30 PM #21
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Thank you for the "suggestion", Dorie.  Much appreciated.  And you're right.  The agent's understanding and application of this info is crucial.  Agents must understand the Mortgage process and its implications on their deals ...

Lyn:  I think much of this can be easily accomplished if agents follow this suggestion:  Talk to the Lender involved PRIOR to placing info and dates on a Contract.  When agent and Lender work in tandem throughout the transaction, the process is much more smooth ...

Susan:  Thank you!  You're so kind ..

George:  Ironic, what you say is exactly the perfect example of what I suggest to Lyn Sims above!  Better to call and word the contract to best suit your client.  I say, contact us (the Lenders).  Much easier to receive that call then to try to amend a Contract or deal later ...  great point!!

Chuck:  Great idea!  And I'm sure that your Preferred Lender would be more than happy to contribute to that meeting(s) regarding this issue.  Underwriters WILL object, if their problems ...

Jeremy:  You prove my point!  Issues WILL come back to haunt you ...

Clean contract ... great way to put it, Jane!  Shout out if I can ever clarify or help in any way ...

Thank you, Noah!  I did write with a focus on Chicagoland transactions, as that is what I know and deal with.  Hope this proves beneficial to you and your clients moving forward ...



Jun 26, 2013 11:50 PM #23
Gary Frimann, CRS, GRI
Eagle Ridge Realty / Signature Homes & Estates - Gilroy, CA
REALTOR and Broker
I, for one, am glad to see lenders tightening down on this (now former) practice. Personally, I think it was abused. I can't blame the lenders at all. It's all part of our new reality.
Jun 27, 2013 12:35 AM #24
Jerry Newman
Brown Realty, 210-789-4216,www.JeremiahNewman.com - San Antonio, TX
Texas REALTOR, San Antonio Military Relocation

Hi Gene, This is a very timely and informative post. I have seen a lot of repair concessions in my area too. We have a form "In Lieu of Repair" where seller agrees to give buyers a monetary amount to be added to closing costs. Sometimes, I have seen it taken off the Sales Price, but that may lead to other issues as you explained above.

Jun 27, 2013 01:45 AM #25
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Every facet of our business and industry has evolved from years ago.  Alot of that taking place fairly recently, Gary.  We keep tweaking the business to make it smarter and more beneficial for our clients.  Live and learn ...

Jerry:  You touch upon the reason that I spoke directly to those in Chicagoland ... and added that each Brokerage may have their own methods of addressing this issue.  Your "In Lieu of Repair" forms proves my assumption regarding that matter.  I applaud that your company deals with this issue proactively ...


Jun 27, 2013 07:38 AM #26
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Carla:  You prove why it's so important to work hand in hand with your local Lender regarding these issues.  They will know best how to address the issue to your clients benefit ... and make sure the process moves along smoothly ...

Joan:  When a Lender tells you something like that ... worry.  And as I said to Carla above, the topic and question you raise proves why it's good to work with a local lender when facing this issue.  They will know how best to help you structure the Contract for the least amount of issues to rise ...

Sharon:  Escrows many times seem scarey to Buyers ... at least that is how I've seen it.  The unknown and uncertainty of the timing and application don't sit well.  Best to address the issue pro-actively IMO.  Sounds like exactly what you are doing ...

Margaret:  Seems as though the situation always gets worked out ... but not without some level of stress attached to it.  Again, talking to the Lender ahead of time can help smooth the path ... hopefully this is what occurred?

Thanks, David.  Appreciate the thumbs up.  And yes, the issue crops up enough to warrant the post.  Best to try to head it off at the pass, if possible ...

Jeff:  True ... the repairs or disfunctioning feature can be a negotiating tool in these situations.  I would add ... as long as the Appraiser or Home Inspector doesn't demand repair as part of the lending process.  That can be a wrench ...

Thank you, Gita.  Your bookmark is appreciated ...

Differing locations, differing municipalities, differing local rules, differing customs will often determine how these situations are handled.  What is customary one place is not in another. On a broad scale ... my recommendation to talk to the Lender PRIOR to contract being written and signed will reveal those things and prove beneficial ...

Sally:  Unfortunately I see this happening with agents that I would expect (because of the length of time they have been in the business) it would not happen with.  For those, this can serve as a reminder ...

Tim:  You raise a very good point.  And one that I'm sure agents must deal with fairly often.  Negotiations can get tricky as a result ...

Appreciate your thumbs up, Corinne.  And don't get me started on Attorneys.  Sometimes I'm left shaking my head ...


Jun 27, 2013 08:00 AM #27
Bob Crane
Woodland Management Service / Woodland Real Estate, Keller Williams Fox Cities - Stevens Point, WI
Forestland Experts! 715-204-9671

Great advice Gene, I am sure that this will keep a few people from a disappointment when their loan fails.

Jun 29, 2013 02:08 PM #28
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Hoping so, too Bob.  Trying to raise the awareness of issues just so we don't have bad endings and lost time ...


Jun 30, 2013 12:26 AM #29
Debbie Cook
Long & Foster Real Estate, Inc - Silver Spring, MD
Silver Spring and Takoma Park Maryland Real Estate


Thanks for posting this.  This is true everywhere - not just Chicagoland!  Yet agents continue to write "5,000 credit for repairs" into contracts!!  Wish all agents knew this one simple thing!!!

Jun 30, 2013 11:04 PM #30
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Agreed, Debbie.  How the Contract is written is terribly important to the timeliness, flow, and success of the transaction ...


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Aug 01, 2013 09:07 PM #33
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