Today the Tennessean is reporting about the increased and unusual incentives being offered by sellers. (see the link below) One builder is offering a car or a trip or a year's tuition to Vanderbilt. Sounds great!
But buyers need to be aware that such incentives will likely reduce the amount that a lender can lend off of, essentially voiding the incentive. For example:
Sales Price: $350,000
Incentive: $10,000
Sale Price Lender will use: $340,000*
*This number is then the starting point for all lending factors - ie, 80% LTV, appraisal, ect
80% LTV = $272,000
Borrower would bring $78,000 to closing ($350k - $272k) plus any closing costs and prepaids
In this scenario the borrower would have to bring an extra $8k to closing to cover the reduction - so there is NO incentive!
Now this only applied to incentives that aren't related to the home. If the contract states that $10,000 will be used for closing costs and prepaids - and you are within the loan program's allowable guidelines - then you'll be fine. But incentives that are not related to the home or the transaction will likely cause borrowers some pain. Also becareful on items that appear to be related to the home - such as drapes and flat panel TV's - lenders finance real property not decorations that likely won't still operate or be in fashion when the home is marketed again.
I had this experience with a Florida home buyer who was provided on the contract with a 7-day cruise. We had to establish value for the cruise and reduce the value of the amount by that amount. The buyer was obviously not very happy and eventually rewrote the contract without the cruise for about $3k less.
As a lender, I feel like we are too often the ones who lay the law down and say, "sorry, can't be done." Sometimes I feel like an overprotective parent that won't let the kids play on the swings. But so much in our business is about setting expectations. Remind your clients that they are buying a home, not a trip or a car. Have them fall in love with the home, not the incentive and then negotiate down without the incentive.
What about paying my taxes and insurance for 2 years? Items related to the cost of acquiring the home can be included - as long as they fall within the loan program's guidelines. Your lender and title attorney can hammer out what can be done in this realm.
Most sellers are putting these carrots out there simply for the attention - they will likely get increased attention but is it the right attention? Too often, you'd get the same result if you just gave away free hot dogs (maybe not for the $2m listing) - and in that case you wouldn't have to worry about the incentive messing with the financing.
http://www.tennessean.com/apps/pbcs.dll/article?AID=2008806200405
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