Linda Kay's Blog: July 2009

Having the seller pay some or all of your closing costs is common. Some buyers and their real estate agents have a hard time structuring these type of transactions. Below are FAQ's to help you understand the structuring needed for a purchase with seller concessions.

Clarifying Terms

When talking about this topic there will be many phrases thrown around that basically mean the same thing; seller concessions, seller paid closing costs, seller assistance, seller contributions, and more. For our purposes we will use the term seller concessions.

How much can I ask for in seller concessions?

Typically on conventional loans the most a buyer receives in seller concessions is 3% (On a $100,000 purchase, $3,000). Making a larger down payment can raise the amount of concessions allowed from 3% to 6% or even 9%. However you rarely see these high concession amounts because if a buyer is putting, for instance, 25% down on a home, they don't have the seller pay concessions for them. Not only that, but if you need 9% in concessions, something is usually wrong with your financing.

On FHA loans, you can receive up to 6% in concessions. (On $100,000 purchase price, $6,000) Typically the lower the purchase price the higher percentage of seller concessions you will need. It is not typical to have a $300,000 purchase price and need $18,000 in seller concessions. It is much more typical to see, for instance, a $60,000 purchase price and have $3,600 in concessions.

On USDA loans, there is no limit to the allowable seller concessions, other then it has to make sense. A buyer would not typically need a percentage of seller contributions over about 4-5%. There are some examples below of reasons why a high percentage of concessions would be needed.

How do I calculate the seller concessions?

Simply take the purchase price, and multiply it by the percent allowed for the type of loan. For example, a $100,000 purchase price with 3% concessions is $3,000, and 6% concessions is $6,000, etc. On a calculator, you would multiply 100,000 x .03 or .06 respectively.

What can seller concessions cover?

Seller concessions can cover your closing costs which may include mortgage related fees, title company fees, the set-up of an escrow account, your home owner's insurance costs, state taxes or stamps, and more. Many, but not all, home owner's insurance companies will allow you to pay the policy premium at settlement. If that is important to you find out upfront. Seller concessions CAN NOT be used for a down payment.

What is NOT Seller Concessions?

Grants are not seller concessions. Down-payment assistance programs are not seller concessions either.

For first time home buyers, a lender and real estate agent that work together closely can structure an offer to purchase a home where you can utilize both a grant to pay for all of your required downpayment, and seller concessions to cover all of your closing costs. It is not rocket science. You simply have to work with people that know what they are doing.

It is important for your lender and your real estate agent to convey approval terms BEFORE making an offer on a home. Any real estate agent worth your time would have a buyer pre-approved before submitting offers on a home. This being said, it is important that your real estate agent not only knows how much you can afford, but also the terms and conditions of your approval. Some pre-approvals are contingent on seller concessions and/or grants. This needs to be communicated to all parties up-front.

Am I paying more for a home if I use seller concessions?

Some people may look at their purchase of a home in this way; (Using round figures) I can pay $190,000 for a home and pay my own settlement costs of $10,000 I can pay $200,000 for a home and have the seller pay $10,000 of my settlement costs. Viewed this way you are actually financing the costs. You pay interest on $10,000 more, BUT you get to keep $10,000 in your pocket, which more importantly you can keep for a safety net (and earn interest from yourself).

SIDE NOTE: This aspect can not be over-emphasized. If your lender thinks it is "OK" to put you in a home where you have literally a few hundreds dollars in the bank after settlement, you both are setting up for a VERY RISKY situation and one which could go into default very quickly. It is unwise to purchase a home and immediately be poor. It would do all home buyers well to consider this before purchasing a home. Hopefully you will have a lender or real estate agent who would care more about you in this sense then than just getting another paycheck, but don't assume that.

Ways to utilize seller concessions for your benefit

• Have some or all of your closing costs paid by the seller.
• As a first time home buyer utilize both a grant and seller concessions to cover your closing costs and down payment requirements.
• Create a financially safe environment by keeping more money in your pocket after settlement. This aspect is overlooked too often yet is very important to you as a home owner.
• Have the seller pay points for you. This will make your monthly mortgage payment lower by giving you a lower interest rate.  In some cases this can be the deciding factor on if you qualify to buy a home. This will also lower your debt-to-income ratio, which is one of the major factors a lender looks at when approving a loan.
• Avoid private mortgage insurance (PMI). If you are a buyer that has the assets available to make a 20% down payment, but not enough assets to pay closing costs, then have the seller pay your closing costs. This will bring you to the 80% loan-to-value level and allow you to eliminate PMI. (NOTE: This is all negotiated when you make your offer on a home and agree to terms).

Conclusion

Seller concessions are an important part of home financing. Used correctly, seller concessions can save a buyer money, allow more financing options, and create a financially safe environment. Consider these important aspects prior to making an offer on a home and you will be much better off, both at settlement and in the long term.

If you have any questions about seller concessions or any other mortgage/real estate topic(s), feel free to contact Steve Kappre directly.

 

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Steve Kappre is a Mortgage Planner with Treasury Mortgage. Steve specializes in;

• All areas concerning First-Time Home Buyer Mortgages, grants, down payment assistance, police and fire loans, rehab loans, and more.

• Reverse Mortgages

• Equity Management strategies for high-end homes and high net worth individuals.

Contact Steve Kappre directly at 856-419-3561 or at www.stevekappre.com

 

 

CONDO ALERT -  Yes, condos have looked attractive to many borrowers of lately because they are dropping in price in several areas by more than a few dollars. But so many people are asking why Condos are more difficult to purchase now than ever before. And so many are complaining that lenders are being more difficult when purchasing condos. The main reason?  Many condo associations are under water when it comes to the monthly dues that they collect. They are in the red... I know of one association that is over $50,000 in the red. By normal standards, the association is suppose to have 2 months or more in reserves per unit. Hence why it's been harder to get buyers a mortgage when there are no funds in the reserve account.

In any case, HUD just added a new mortgagee letter on June 12th, 2009... ML 2009-19. Condominium Approval Process

 

 

 

So, what does this all mean?  The mortgagee letter, ML 2009-19, goes into effect on FHA loans with any FHA case number assigned on or after October 1, 2009.  What is the biggest issue with this new mortgagee letter? The Spot Approval process as defined in Mortgage Letter 1996-41 is eliminated with issuance of this guidance. The DELRAP and HRAP processes have been streamlined to allow for uncomplicated condominium project approvals eliminating the need to approve units on a “spot loan” basis.

Overall, in laymens terms?  Lenders won't be able to do 'spot approvals' of a condo unit. What they will still be able to do though is to approve a whole condo project. The mortgagee letter goes into more detail stating that only those lenders that have experience in condo project approvals should do this. In regards to Infinity Home Mortgage Company, we have a few underwriters with 15 + years of doing condo project approvals. And we will take this challenge and still approve condo projects. But HUD says that it can only be done 2 ways. Per the mortgagee letter, this is stated :

 

The Lender will have 2 options:

1. HUD Review and Approval Process (HRAP).
2. Direct Endorsement Lender Review and Approval Process (DELRAP), outlined in this Mortgagee Letter. This option is only available to lenders who have unconditional Direct Endorsement authority and staff with knowledge and expertise in reviewing and approving condominium projects.

 

What type of projects are allowed under this new process?

1. Proposed/Under Construction;
2. Existing Construction; or
3. Conversions.

 

 

Conclusion :  As mentioned, HUD states that only those lenders that have experience in the past should be doing these condo project approvals.  Yes, they have streamlined the process to make it simpler. But taking away the spot approvals will add more time onto these approvals. I didn't want to bore anyone with the details of what is allowed, what is not allowed, and what the process is for these approvals.  But it can be read in this mortgagee letter, ML 2009-19.  Overall, FHA loans are very affordable and this news about spot approvals should not discourage any borrower.... but...  be very careful about the association dues, because I have seen many more in recent months become more expensive, just because the lack of funds in the reserve accounts, which is needed for approval. And HUD will always be updated the Condo approval list. You can find out if your condo association is approved by clicking on this link. HUD condo approved list

 

 

 

 

                    

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For more information on FHA loans, please go to this link. The FHA Expert

For more information about the 2009 Tax Credit for First Time Homebuyers : 2009 Tax Credit

For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags !!!!

Copyright © 2009 by Jeff Belonger of Infinity Home Mortgage Company, Inc