Seller Paid Closing Costs - Knowledge is Power

Seller Paid Closing Costs - Knowledge is Power
By Kristin Abouelata

If you haven't negotiated a bunch of home contracts, you may not be aware that you can ask the seller to pay a portion of your closing costs. Just how does that work?

When you're considering making an offer on a home, there are other ways to get a good deal other than just snagging the lowest price you can imagine. Most loan programs allow the seller to concede money toward the buyer's closing costs that would normally walk away with the seller in his pocket. Oftentimes, seller paid closing costs can make a home more affordable for you. You just have to make sure you stay within the allowable guidelines for the mortgage product you need.

You see, a lot depends on what type of loan you are getting. The scenarios I am going to discuss all pertain to if you are buying your primary residence, not an investment or second home. And the reason the amount that a seller can pay on your behalf varies from product to product is because different loan types have different documentation requirements, and therefore, different layering of risks. So, it's important to compare apples to apples. The less money out of your pocket invested into your home presents a higher risk for the lender, regardless of the source of the funds to close.

For instance, I had a loan the other day where the seller had agreed to pay up to 6% of the sales price in closing costs on behalf of the borrower. Totally reasonable since the borrower was getting an FHA loan. Unfortunately, the home wasn't up to FHA standards, and the loan had to switch to Conventional financing. Whoops. Conventional financing only allows for 3% seller concessions if one is putting less than 10% of the sales price down on the property. All of a sudden the negotiated contract wasn't working out to the benefit of the borrower quite as nicely. She actually would be paying more for the property than she need be without the same benefit to her unless she re-negotiated a lower sales price. Why is that? Well, originally the sales price was $100,000. The seller was giving her $6,000 toward closing costs and walking away with $94,000 in his pocket. Now, Conventional underwriting guidelines would only allow him to give the buyer $3,000. So his pockets would be a bit fuller unless the buyer renegotiated.

Different loan programs have different allowable amounts for seller concessions. For instance, VA loans allow the seller to pay 4% of closing costs, and Rural Housing loans have no limit on seller paid closing costs. Conventional loans will allow up to 6% seller paids, but the buyer has to put more than 10% money down on the property. And finally, FHA allows for 6% of sales price paid on behalf of the buyer toward closing costs.

Don't lose sight of the fact that seller paid closing costs usually don't count toward a buyer's minimum out of pocket investment required. For conventional and FHA, you usually have to come up with at least 3% of your own funds regardless of how much the seller is willing to help out. VA loans and Rural Home loans allow for 100% financing in most cases, so you're good to go there. And FHA will allow the seller to participate in a down payment assistance program and contribute toward your 3% investment, but that's a whole other article to write (and who knows if it will still be ok by the time this article makes it to print).

Your best rule of thumb is to work with a lender and realtor who know what they are doing. And if you have any doubts, your lender should be able to define your limitations for you pretty quickly. So, arm yourself with knowledge when negotiating your contract. It is always to your advantage to negotiate from a position of strength, and knowledge is power in this case.

Let My Experience Work For You!

Email your home loan financing questions to Kristin Abouelata, Home Loan Specialist with Mortgage Investors Group, at question@kristinmortgage.com or

call direct: (865) 567-0113
Toll Free: 1-800-489-8910.

For more information visit her website at http://www.kristinmortgage.com Home Loans Plain Talk.

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Seller Paid Closing Costs: Knowledge Is Power

If you haven’t negotiated a bunch of home contracts, you may not be aware that you can ask the seller to pay a portion of your closing costs. Just how does that work?

When you’re considering making an offer on a home, there are other ways to get a good deal other than just snagging the lowest price you can imagine. Most loan programs allow the seller to concede money toward the buyer’s closing costs that would normally walk away with the seller in his pocket. Oftentimes, seller paid closing costs can make a home more affordable for you. You just have to make sure you stay within the allowable guidelines for the mortgage product you need.

You see, a lot depends on what type of loan you are getting. The scenarios I am going to discuss all pertain to if you are buying your primary residence, not an investment or second home. And the reason the amount that a seller can pay on your behalf varies from product to product is because different loan types have different documentation requirements, and therefore, different layering of risks. So, it’s important to compare apples to apples. The less money out of your pocket invested into your home presents a higher risk for the lender, regardless of the source of the funds to close.

For instance, I had a loan the other day where the seller had agreed to pay up to 6% of the sales price in closing costs on behalf of the borrower. Totally reasonable since the borrower was getting an FHA loan. Unfortunately, the home wasn’t up to FHA standards, and the loan had to switch to Conventional financing. Whoops. Conventional financing only allows for 3% seller concessions if one is putting less than 10% of the sales price down on the property. All of a sudden the negotiated contract wasn’t working out to the benefit of the borrower quite as nicely. She actually would be paying more for the property than she need be without the same benefit to her unless she re-negotiated a lower sales price. Why is that? Well, originally the sales price was $100,000. The seller was giving her $6,000 toward closing costs and walking away with $94,000 in his pocket. Now, Conventional underwriting guidelines would only allow him to give the buyer $3,000. So his pockets would be a bit fuller unless the buyer renegotiated.

Different loan programs have different allowable amounts for seller concessions. For instance, VA loans allow the seller to pay 4% of closing costs, and Rural Housing loans have no limit on seller paid closing costs. Conventional loans will allow up to 6% seller paids, but the buyer has to put more than 10% money down on the property. And finally, FHA allows for 6% of sales price paid on behalf of the buyer toward closing costs.

Don’t lose sight of the fact that seller paid closing costs usually don’t count toward a buyer’s minimum out of pocket investment required. For conventional and FHA, you usually have to come up with at least 3% of your own funds regardless of how much the seller is willing to help out. VA loans and Rural Home loans allow for 100% financing in most cases, so you’re good to go there. And FHA will allow the seller to participate in a down payment assistance program and contribute toward your 3% investment, but that’s a whole other article to write (and who knows if it will still be ok by the time this article makes it to print).

Your best rule of thumb is to work with a lender and realtor who know what they are doing. And if you have any doubts, your lender should be able to define your limitations for you pretty quickly. So, arm yourself with knowledge when negotiating your contract. It is always to your advantage to negotiate from a position of strength, and knowledge is power in this case.

Let My Experience Work For You!

Email your home loan financing questions to Kristin Abouelata, Home Loan Specialist with Mortgage Investors Group, at question@kristinmortgage.com or call direct: (865) 567-0113 Toll Free: 1-800-489-8910.

For more information visit her website at http://www.kristinmortgage.com/ Home Loans Plain Talk.

Mortgage Loan Approval Sometimes Need A Human Touch

The mortgage industry can usually tell you in a matter of minutes if you are approved for a loan by inputting your information into an automatic underwriting system. But what if your credit profile doesn’t fit inside the standard guidelines? You may be eligible for a manual underwrite, where a real person eyeballs your credit file…….

In the mid 1990’s, the mortgage industry saw the credit score and its predictive power to assess a borrower’s ability to repay a mortgage step into the limelight as one of the most indicative factors for loan approval. After conducting statistical test after statistical test, Fannie, Freddie and Ginnie, the 3 big lending institutions, mandated that the credit score should be used in conjunction with manual underwriting to assess loan approval. Not too long after, automated underwriting systems (AUS) were developed that expedited and streamlined the underwriting process even further for lenders. A loan officer today simply inputs a borrower’s key information into the preferred underwriting automatic engine, such as his/her credit score, income, amount being borrowed, cash reserves, employment and housing history, and the value of the property. A response is returned by the underwriting engine recommending approval or denial for the loan.

If your loan receives a denial from an AUS, the buck doesn’t necessarily stop there. Life happens to people, and oftentimes it’s going to take a real live person understanding the nuances of a file to make an underwriting decision. That’s when your lender may suggest submitting your file to underwriting for a manual review. After all, not everything in life can be automatic, right?

A perfect scenario for a manually underwritten file would be someone who has no credit scores. No credit scores? Yes, it is possible. I’ve had customers who, being old school and always having paid for everything in cash, had never established traditional credit lines that reported to credit reporting bureaus. In a case such as this one, I had to submit non-traditional lines of credit to underwriting, something a machine can’t assess. This means I had my customer bring in bills he had paid on time for the past year to create a credit history. Typical ones used are car insurance, utility bills, cell phone bills and cable bills. You can expect to have to provide 3-4 different trade lines if you haven’t established a traditional credit history and score.

“The most typical reason we see a file submitted to us for manual underwriting is for either no credit score or an error reported on a credit report,” reflects Patricia Haynes, onsite Government Underwriter at Mortgage Investors Group. “For instance a judgement that doesn’t really belong to the borrower. Maybe it’s really Dad’s judgement reflected on the son’s report because Junior and Dad have the same name. That’s when I can overwrite an AUS decision because I have the documentation to support my decision to do so in front of me.”

Another very common reason to submit a loan for a manual underwrite is when your customer’s credit score is below 620 and gets an AUS denial. If this is the case with your loan, be prepared to provide more than average documentation about your credit history, as well as written explanations as to why your credit score has suffered recently. Maybe two years ago you had a financial meltdown due to a medical illness, but in the last twelve months, you can prove you are back on your game and have been repaying debt. However, your credit scores haven’t exactly caught up with your actions. An underwriter is going to piece together the different aspects of your file and see if it makes sense. Your home lender should be able to review your file and guide you as to what documentation an underwriter will want from you to grant you loan approval.

Naturally, if your credit score is really low and you have very little explanation for your state of credit affairs other than you failed to pay your bills on time, don’t hold your breath for loan approval. An underwriter can see through smoke and mirrors. After looking at files as long as they have, they can basically sniff out a loan that has merit from the ones that are too risky.

So, even as our world gets more and more automated every day, it’s nice to know that you can’t replace genuine common sense, even in the mortgage industry. And it’s nice to know that you can plead your case for credit worthiness to a real live human being.


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Let My Experience Work For You!
Email your home loan financing questions to Kristin Abouelata, Home Loan Specialist with Mortgage Investors Group, at question@kristinmortgage.com or call direct: (865) 567-0113 Toll Free: 1-800-489-8910. For more information visit her website at www.kristinmortgage.com Home Loans Plain Talk.