FSBO Closing Costs


What Are Closing Costs?

When selling your home “For Sale by Owner” (aka FSBO), your lender usually prepares a “Good Faith Estimate” of house closing costs. You are entitled to receive this estimate no later than three business days after you apply for a loan. Because it is an estimate of the costs you may incur, it may not contain all potential costs. The lender will not know what all of the costs are going to be. The “Good Faith Estimate” will be an estimate based on previous experience. Actual closing expenses usually exceed the estimate. To avoid problems, go prepared to pay more than the amount listed on your estimate.

If you are comparing two lenders, look only at the costs charged by the lender. Lenders can only make educated guesses about the charges made by others.

You will receive an itemization of costs you may have to pay when you buy your home. The costs are listed in the order that they should appear on a Good Faith Estimate you obtain from a mortgage lender.

There are two broad categories of house closing costs. Non-recurring house closing costs are items that are paid once and you never pay again such as loan origination fees, recording fees, survey fees, etc. Recurring house closing costs are items you pay again over the course of home ownership, such as property taxes and homeowner’s insurance.

Closing costs are usually made up of the following:

1. Attorney’s or escrow fees (yours and your lender’s if applicable)

2. Property taxes (to cover tax period to date)

3. Interest (paid from date of closing to 30 days before first monthly payment)

4. Loan origination fee (covers lender’s administrative costs)

5. Recording fees

6. Survey fee

7. First premium of mortgage insurance (if applicable)

8. Title insurance (yours and your lender’s)

9. Loan discount points

10. First payment to escrow account for future real estate taxes and insurance

11. Paid receipt for homeowner’s insurance policy (and fire and flood insurance if applicable)

12. Any documentation preparation fees.

On closing day, you’ll present your paid homeowner’s insurance policy or a binder and receipt showing that the premium has been paid. The closing agent will then list the money you owe the seller (remainder of down payment, prepaid taxes, etc.) and then the money the seller owes you (unpaid taxes and prepaid rent, if applicable). The seller will provide proofs of any inspection, warranties, etc.

Once you’re sure you understand all the documentation, you’ll sign the mortgage, agreeing that if you don’t make payments the lender is entitled to sell your property and apply the sale price against the amount you owe plus expenses. You’ll also sign a mortgage note, promising to repay the loan. The seller will give you the title to the house in the form of a signed deed.

You’ll pay the lender’s agent all house closing costs and, in turn, he or she will provide you with a settlement statement of all the items for which you have paid. The deed and mortgage will then be recorded in the state Registry of Deeds, and you will be a homeowner.

At closing, you will get:

1. Settlement Statement

2. HUD-1 Form (itemizes services provided and the fees charged; it is filled out by the closing agent and must be given to you at or before closing)

3. Truth-in-Lending Statement

4. Mortgage Note

5. Mortgage or Deed of Trust

6. Binding Sales Contract (prepared by the seller; your lawyer should review it)

7. Keys to your new home

Your Settlement Costs are going to consist of the following:

1. Sales/Broker’s Commission: This is the total dollar amount of the real estate broker’s sales commission, which is usually paid by the seller. This commission is typically a percentage of the selling price of the home.

2. Items Payable in Connection with Loan: These are the fees that lenders charge to process, approve and make the mortgage loan.

3. Loan Origination: This fee is usually known as a loan origination fee but sometimes is called a “point” or “points.” It covers the lender’s administrative costs in processing the loan. Often expressed as a percentage of the loan, the fee will vary among lenders. Generally, the buyer pays the fee, unless otherwise negotiated.

4. Loan Discount: Also often called “points” or “discount points,” a loan discount is a one-time charge imposed by the lender or broker to lower the rate at which the lender or broker would otherwise offer the loan to you. Each “point” is equal to one percent of the mortgage amount. For example, if a lender charges two points on a $80,000 loan this amounts to a charge of $1,600.

5. Appraisal Fee: This charge pays for an appraisal report made by an appraiser.

6. Credit Report Fee: This fee covers the cost of a credit report, which shows your credit history. The lender uses the information in a credit report to help decide whether or not to approve your loan and how much money to lend you.

7. Lender’s Inspection Fee: This charge covers inspections, often of newly constructed housing, made by employees of your lender or by an outside inspector.

8. Mortgage Insurance Application Fee: This fee covers the processing of an application for mortgage insurance.

9. Assumption Fee: This is a fee which is charged when a buyer “assumes” or takes over the duty to pay the seller’s existing mortgage loan.

10. Mortgage Broker Fee: Fees paid to mortgage brokers would be listed here. A CLO fee would also be listed here.

11. Interest: Lenders usually require borrowers to pay the interest that accrues from the date of settlement to the first monthly payment.

12. Mortgage Insurance Premium: The lender may require you to pay your first year’s mortgage insurance premium or a lump sum premium that covers the life of the loan, in advance, at the settlement.

13. Hazard Insurance Premium: Hazard insurance protects you and the lender against loss due to fire, windstorm, and natural hazards. Lenders often require the borrower to bring to the settlement a paid-up first year’s policy or to pay for the first year’s premium at settlement.

14. Flood Insurance: If the lender requires flood insurance, it is usually listed here.

15. Title Charges: Title charges may cover a variety of services performed by title companies and others. Your particular settlement may not include all of the items below or may include others not listed.

16. Settlement or Closing Fee: This fee is paid to the settlement agent or escrow holder. Responsibility for payment of this fee should be negotiated between the seller and the buyer.

17. Abstract of Title Search, Title Examination, Title Insurance Binder: The charges on these lines cover the costs of the title search and examination.

18. Document Preparation: This is a separate fee that some lenders or title companies charge to cover their costs of preparation of final legal papers, such as a mortgage, deed of trust, note or deed.

19. Notary Fee: This fee is charged for the cost of having a person who is licensed as a notary public swear to the fact that the persons named in the documents did, in fact, sign them.

20. Attorney’s Fees: You may be required to pay for legal services provided to the lender, such as an examination of the title binder. Occasionally, the seller will agree in the agreement of sale to pay part of this fee. The cost of your attorney and/or the seller’s attorney may also appear here. If an attorney’s involvement is required by the lender.

21. Title Insurance: The total cost of owner’s and lender’s title insurance is shown here.

22

. Lender’s Title Insurance: The cost of the lender’s policy is shown here.

23. Government Recording and Transfer Charges: These fees may be paid by you or by the seller, depending upon your agreement of sale with the seller. The buyer usually pays the fees for legally recording the new deed and mortgage (line 1201). Transfer taxes, which in some localities are collected whenever property changes hands or a mortgage loan is made, can be quite large and are set by state and/or local governments. City, county and/or state tax stamps may have to be purchased as well

24. Survey: The lender may require that a surveyor conduct a property survey. This is a protection to the buyer as well. Usually the buyer pays the surveyor’s fee, but sometimes this may be paid by the seller.

25. Pest and Other Inspections: This fee is to cover inspections for termites or other pest infestation of your home.

26. Lead-Based Paint Inspections: This fee is to cover inspections or evaluations for lead-based paint hazard risk assessments.

27. Total Settlement Charges: The sum of all fees in the borrower’s column entitled “Paid from Borrower’s Funds at Settlement” is placed here. This figure is then transferred to line 103 of Section J, “Settlement charges to borrower” in the Summary of Borrower’s Transaction on page 1 of the HUD-1 Settlement Statement and added to the purchase price. The sum of all of the settlement fees paid by the seller are transferred to line 502 of Section K, Summary of Seller’s Transaction on page 1 of the HUD-1 Settlement Statement.

Don’t be overwhelmed by all of the fees and charges. Your closing agent will go over each item one line at a time.

house closing costs

House Closing Costs Can Eat Up your Equity

Closing costs are an inevitable part of buying or refinancing a home. Closing costs can represent a significant out of pocket expense. If you are involved in stopping foreclosure this becomes problematic as you are likely trying to conserve whatever cash resources you have.

Closing costs are unavoidable for at least one of the parties involved, but there are ways to reduce this expense. Education of the home buying process is necessary and consumers should educate themselves on the closing process and all of the fees involved. They should also learn about potential scams that less scrupulous companies may employ so they can protect themselves. To avoid being victimized, along with obtaining the best deal on house closing costs, borrowers should carefully consider the following advice.

Do your homework. Educate yourself on the multitude of options available that reduce house closing costs. Learn which are beneficial and which ones just transfer the costs to the loan, which can end up costing more in the long run. With the amount of information available today there is no excuse for being unprepared. Visit your local library, bookstores, search the Internet and read free information from experts in the field. There are forums on the Internet where others like yourself who have been through this left their comments on the experience. This type of information is priceless, and best of all it isn’t slanted to selling you anything. The information is out there and consumers should read and digest everything they can. It is also a good idea to do some research on real estate scams and real world examples of mistakes that others have made.

A recent phenomenon gaining popularity is no closing cost loans. They seem like a great idea, but the problem with these types of offers is that in reality the house closing costs are simply added to the mortgage and the borrower ends up paying more interest on the loan. In the end the house closing costs could end up costing significantly more than if they were paid up front. If there is no money available to pay house closing costs up front this option may be beneficial but if it can be avoided do so by all means.

If the real estate market in your area is favorable for it then consider negotiating with the seller to pay all or some of the closing cost themselves. If homes are selling quickly and at market price it may be more difficult to convince the seller to contribute to house closing costs as there is a good chance that the house will sell otherwise.

If you find that local real estate promotes a buyers market then you have much more leverage, especially if the seller is having a difficult time selling the house. They may be more willing to negotiate an agreement to help with or pay for all of the house closing costs. If you happen to be refinancing this option is unavailable.

One of the largest components in house closing costs is title insurance. Many consumers are unaware of what title insurance and do not know that they need it. That is until they see it as one of the costs on the closing documents. Because of this lack of knowledge most consumers have no idea of their right to shop around for title insurance. They simply allow their mortgage broker or real estate agent to take care of this, which can be a big mistake. By shopping around for title insurance consumers can cut $100’s or even $1000’s from their house closing costs.

There are other fees, such as courier fees, notary fees, documentation fee, overnight delivery fee, points, processing fee, and others which may be duplicates of other fees, or which are fees which the originator has marked up to add to it’s profit margin. These are the fees, sometimes called hidden fees, which you may overlook or not feel you have the right to question. You do have that right.

There are other options available that can cut house closing costs whether you are refinancing or buying a home. A little research can go a long way and if consumers take the time they should be able to find something that suits their needs. We all want to save money, conserve any home equity, and all it takes is a little time to gain some knowledge and make the appropriate decisions.

House Closing Costs

House Closing Documents for Home Buyers

As a home buyer, what house closing documents do I get at a house closing?

Assuming no mortgage is involved, what house closing documents am I supposed to get at a real estate home / condo purchase closing?

What documents do I sign?

Which ones prove that I now own the property?

And if a wire transfer is involved, does the fact that the title / escrow company has disbursed funds to seller mean I know legally own the property and title is clear (title insurance bought) and title company has already recorded new owner with government agencies?

House Closing Documents

House Closing Lawyer Fees

How Much Should I Expect to Pay in for a House Closing Lawyer When Doing My House Closing?

House Closing Lawyer – House Closing Costs

How House Closing Costs Affect Home Mortgage Rates

House closing costs have a significant impact on the home loan rate that is paid when obtaining a new mortgage loan. Here are a few of the major house closing costs and how they affect the home mortgage rates.

House closing costs Affecting Home Mortgage Rates

First time home buyers or borrowers are often rather unpleasantly surprised at the time of closing or just prior when the good faith estimate of house closing costs is received. These house closing costs can sometime add a significant cost to the dollar amount that the borrower is expected to provide to clear the escrow account at the time of closing or shortly thereafter. The home loan rate is not directly tied to each of the house closing costs, but indirectly, you will pay the house closing costs. You should make sure you realize and understand each of these costs and how they impact your total cost of the loan.

Definitions

‘House closing costs’ is just one of the definitions that you should understand when considering obtaining a home loan. The ‘home loan rate’ is another. Closing costs are expenses related to the obtaining of the loan, such as document preparation, title search, appraisals, and various other expenses. These costs are typically listed as part of the closing process on the loan. The closing of the mortgage at the title company or with the loan officer will spell out each of these costs and who is responsible for payment of the cost at closing.

Title search

One of the responsibilities that must be met is a search by a title company of court records to insure that the ownership or title to the home in question is clear. They will be looking at sales and deed records to determine that the sellers actually have the legal authority to sell the property. There is a fee charged by the title company to conduct this search. The clear title means that the title company can guarantee the title is correct and that you will have a clear title to the property in question after closing. The title company actually provides a type of insurance, known as title insurance. The cost of the title insurance is one of the house closing costs built into the home mortgage rates.

Origination fees

Another factor in the home loan rate is that of origination fees. These are costs associated with the work the lender or broker does in opening an application file and working to collect and pass on all the necessary documentation required to complete the loan according to the contract. These fees can be sizable or modest, depending upon the broker, but in most cases are negotiable also that fact is not commonly known.

Points

The borrower may be required to pay ‘points’ as part of the loan fees. There are two types of points that you may be asked to cover. Origination points are the fees you pay your broker or lender to secure the loan while discount points are essentially interest that you prepay in order to manage the best interest rates on your loan. Both types of points are usually paid at the home of closing. Payment of the discount points can significantly lower your home mortgage rates meaning thousands of dollars less in cost over the life of the loan.

house closing costs

FHA Closing Costs – How They Differ From Conventional Mortgages


FHA Closing costs differ from conventional mortgages by the amount the lender can charge and the amount of insurance coverage homeowners are required to have. FHA mortgages are the last of the government sponsored mortgages. Fannie and Freddie started out as a government charter but privatized over a decade ago. Since FHA is government operated, there are specific safeguards which have been designed to protect borrowers from paying too much house closing costs. However, as is the case with most government programs, there’s loopholes.

When lenders and brokers close a loan, they all incur cost during the process. These costs are passed along to the borrower in the form of higher rates, or house closing costs that are added directly to the closing statement (HUD). In the past, lenders have been known to be very liberal when applying their fees; these extra charges are called “junk fees.” Before you apply, you should insist that the lender disclose their fees on a form called good faith estimate (GFE, you can print a blank form from the link below.)

If you look at your GFE you will see a grouping of fees on the left hand side. Each fee is labeled 801, 802, and so on. These are the lenders fees. FHA has strict guidelines pertaining to the fees that lenders are allowed to charge when closing a loan. Unfortunately, they are very open-minded on the amount of discount points and origination points that they allow lenders to charge.

Lenders are allowed to charge one origination point and two discount points plus the “usual and customary” third party house closing costs that FHA deems relevant. If you combine those fees with the additional money that the lenders can earn from “marking-up” the interest rate; lenders could make as much as $12,000 profit on a $200,000 loan.

In all fairness, most lenders don’t fleece their customers like this, however some do. If you are considering taking out an FHA mortgage I advise you to look at your good faith estimate carefully. If you see discount points listed in the “800” block of numbers do not close your loan. Some lenders will give very compelling arguments as to why they need to charge them, don’t believe it. By disallowing the lender to use discount points, you have effectively forced them to keep their house closing costs in-check.

Another difference in charges that you will see over conventional mortgages pertains to the insurance each agency requires when taking out the loan. Conventional mortgages (Fannie Mae, Freddie Mac) will allow borrowers to forego the mortgage insurance if the loan is less than 80% of the appraised value. Not so with FHA, when you take out an FHA mortgage you will be forced to have mortgage insurance regardless of the loan to value. The exception is when you take out a 15 year mortgage, if your loan is less that 90% of the value of the home you can forego the monthly mortgage insurance.

Also, FHA charges an up front mortgage insurance premium (MIP). This is a one time, lump sum that is added on top of your loan. The MIP is calculated at 1.5% of the mortgage’s loan amount, i.e. a $100,000 mortgage would become a $101,500 loan amount. This premium is refundable on a prorated basis but, the formula that is used to calculate it is stored in the same warehouse that Indiana Jones keeps his worldly treasures.

When you begin to add up the differences between FHA house closing costs and conventional mortgages, it would appear that FHA mortgages have the higher closing. However, it really depends on what your specific circumstances are as to whether or not an FHA mortgage is right for you. If you have good credit and a low loan to value, a conventional mortgage is definitely the best road to take. Even if your loan to value is a little high, you may still want to consider a conventional mortgage. A conventional mortgage charges PMI just like an FHA loan does, however it can be easily removed one the home falls below 80% loan to value, unlike FHA mortgage insurance.

On the other hand, if you have average credit and a higher loan to value FHA becomes the clear winner when choosing the most beneficial loan. The most important reason is that FHA is not a credit score driven product. FHA is a common-sense loan, meaning your credit score doesn’t have a bearing on your ability to get approved. FHA looks at the property, the income, the job stability and the overall responsibility the borrower has exercised in the last year. Of course there are more guidelines, but you get my point. Not to mention that FHA allows homebuyers to put as little as 3% down when buying a home.

house closing costs

Pay for House Closing Costs With a Cash Gift

Pretty much every loan requires some part of down payment, even if you get a 100% financing loan.  After all, you still are generally going to be required to put down some earnest money on your contract and in most cases, pay for an appraisal up front.  You may have been trying to save it up on your own, but it may be time to accept some help from your family.
Most loan programs, be it Conventional, FHA, VA or Rural Housing, require the borrower to pay for something.  In particular, FHA and Conventional home purchases want a minimum of 3% to come out of the borrower’s pocket.  If you are doing a Conventional loan, you still can’t receive a gift for your 3% down payment, but you can use a gift to help with house closing costs. However, the FHA will allow your source of down payment to be a gift.  So, if you find yourself a bit short on cash, you may need to ask someone to gift you the down payment or house closing costs (or both).

All lenders are particular about just who can give you a gift for your down payment or house closing costs.  Pretty much across the board, the gift must be from a blood relative.  You may have to prove that the gifter is a relative thru birth certificates, christening records, etc.  Strange but true.  Conventional loans will also allow an employer to give you a gift.  But in any case, the most important factor is that whoever is giving the gift does not expect to be paid back.  A certification to that effect will be required to be signed by the donor.  Otherwise, it’s really a loan, now isn’t it?  And as a responsible lender, we’re going to include that payment in your debt to income ratio, and we’ll probably want a bunch of documentation to prove the terms, etc.  So, make sure it truly is a gift.

Usually, FHA will allow for down payment assistance programs, such as Nehemiah or Ameridream.  Lenders view these products as “gifts” in a sense. They are basically seller concessions funneled through the down payment assistance channels.   However, by the time this article is published, they may be null and void.   It’s currently being reviewed and could go away.  Or it may still be there, but just know it’s under review.

Lenders are very particular about how the gift funds reach the closing table.  If you deposit the gift before closing, you have to show it coming out of the donor’s account and depositing into your account.  It’s a lot of paper to collect.  The easiest method is for Grandpa or your Great Aunt to just send a cashier’s check payable to you and your title company to the closing table.  Smoother, quicker, simpler.

Gifts are a wonderful thing, and a gift of a down payment is a useful gift.  After all, I think it’s safe to say that homeownership is one gift that keeps on giving, wouldn’t you?

house closing costs

Buying Your First House

Just out of school and considering buying your first home? You’ll be surprised how easy it can be to qualify for a loan. Too often, the newly minted workforce doesn’t realize the confidence lenders have in their ability to be responsible homeowners.

Ok, so Mom and Dad told you that you need to buy a house. You’ve graduated from college and you’re earning a decent income. Even though you don’t feel like it most of the time, you are officially all grown up. But you ask yourself, “I’m only twenty-four years old, who would possibly loan me money to buy a house?”

First time homebuyer programs are established with flexible guidelines to attract – you guessed it -first time homebuyers! You are in a great position to buy a home provided you have established some history of decent credit. Even if you don’t have traditional lines of credit to show for yourself, you may have established non-traditional credit and not even realized it. Do you have utilities, a cell phone and cable bill in your name? Have you paid them on time for 12 months? Then you have established non-traditional credit. Granted, many of you already have a credit card or gas card in your name. That’s why Dad wanted your name on it, too. Good thinking on his part. At the time, you were just excited to get the credit card “for emergencies.” It didn’t even occur to you that you were establishing a good credit history.

Most lenders want to see at least a year under your belt earning income. The majority of new job workers are making at or under the median income limit for their area. There are those that beat the curve, but then, if you’re making that much money on your first job, you don’t need a first time homebuyer program. You can probably take another route to your first home. Also, recent graduates can get credit for having a diploma. If you have a diploma and an employer who is willing to verify that you earn what you say and are likely to continue on with them, then you’re good to go -even without a year’s employment history to show for yourself.

Some lending programs ask that a borrower have maintained an excellent rental history, preferably a two year history. But, you don’t get penalized if you have been living at home. Especially, if home is in the same city that your school is located. You are simply asked to provide explanation as to how you managed to live rent free. Sometimes, Mom and Dad have to provide a written statement. They’re probably willing to do that to get you out of the house and off the payroll.

What about a down payment and house closing costs? Most programs will allow a seller to chip in 3% of the sales price toward your house closing costs. This allowance can cover most if not all of your house closing costs. Your Realtor simply needs to be aware that you need this concession so she/he can negotiate it with your purchase contract. And how much do you have to come up with for a down payment? How about $0? Nearly all first time homebuyer programs are designed for empty pocket consumers with potential to earn more and maintain good credit. Some programs don’t require you to have any reserves in the bank. Since so many first time homebuyers live on a budget, these programs allow for the reality of life. And you can be rewarded for being a conscientious consumer with lower than average interest rates being available to you.

You may be ready to buy your first home and not even know it. A good mortgage specialist will pre-qualify you, find out what you can afford or what your comfortable paying. Then, you just have to find the right home. It’s easier than you think!

House Closing Costs

Home Loan Financing at 100%

With the current “mortgage meltdown” we hear so much about these days, your average consumer thinks that the days of 100% financing have gone by the wayside. True, you are hard pressed these days to find a bank or lender that will want to carry a second mortgage that combined with a first mortgage adds up to 100% financing. That’s because if there is a default, sitting in second lien position is particularly dicey. Too much risk is involved. And since, in recent history, that scenario of the 80/20 combo was the most common 100% financing vehicle available to a certain group of consumers (non first time homebuyers), there’s a misconception out there that 100% options are all but dried up.

But, a-ha! There is hope for someone who has great credit but prefers to invest his/her assets elsewhere when rates are so low. It’s called the Flex 100. And it can apply to purchases and refinance transactions.

I heard an analyst mention on television the other day that mortgage money is so cheap right now it’s like a sale at Macy’s. That made me chuckle, but it’s true. In which case, why not invest your money elsewhere if you qualify for 100% financing. After all, the homes are still appreciating in most areas, but not at the stellar rate we saw in the past.

The Flex 100 requires you to invest $500 of your own cash towards the transaction, so I guess it’s technically not 100% financing, but it’s pretty darn close. And no, you don’t have to be buying your first home to get this deal. You can actually have owned a home in the past three years! However, it does apply to financing your primary residence only. You can’t get this deal for that nice cabin in Gatlinburg you want to use on the weekends or for that great rental down the street you think you can get a good deal on. You’ve got to live in the house to qualify for this financing.

But you can do a refinance, as long as it’s not a “cash-out,” meaning you’re not paying off debt or taking equity out of the property. It must be a rate term refinance only. However, you can pay off that second mortgage or home equity line of credit you hate, IF you obtained that 2nd lien mortgage when you got your first mortgage (a piggy back closing, we call it). Or to make it clearer, you originally had that 80/20 combo mentioned earlier. If you got that home equity mortgage a month or two after your initial closing to build a deck or payoff a credit card, than it that won’t work for a Flex 100 refinance.

What about your credit score? Well, it will affect the price you get, but there is no “minimum” credit score required for this program. You just have to get an approval through the automated underwriting system required. But be realistic – if you’ve got “iffy” credit, you probably won’t get an approval. A borrower with a credit score below a 620 would probably have to have a low loan to value or debt to income ratio for a chance of an approval.

A Flex 100 may or may not make sense for you. But hey, at least you know it’s an option. Your lender should be able to help you determine if this opportunity to flex your mortgage muscle makes sense for you.

Closing On Your Home

Seller Pays House Closing Costs

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 house closing costs that would normally walk away with the seller in his pocket.  Oftentimes, seller paid house 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 house 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 house 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 house closing costs, and Rural Housing loans have no limit on seller paid house 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 house closing costs.

Don’t lose sight of the fact that seller paid house 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.

Closing On Your Home

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