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(Editor’s note, Tim jumped the gun and posted this article by his wife, Lynlee, before I had a chance to set her up as an author. As soon as I have it set-up, I’ll give her the proper introduction.)
I’m writing this because of numerous problems I have encountered in regards to seller paid closing costs. It has been a trend for buyers to increase the purchase price in exchange for sellers paying buyers’ closing costs by the amount of the price increase. For example, we commonly have transactions where the buyer offers $10,000 more than the listing price and the seller will pay up to $10,000 of the buyer’s closing costs.The financing addendums used in our area specifically indicate that the seller credit may be applied only towards actual closing costs/pre-paids (interest,taxes, HO Dues, etc). The problems that we have encountered occur when the closing costs are less than the amount the seller agreed to contribute.For example, if the seller agreed to pay up to $10K, and the closing costs only come to $8K, then the buyer is looking to get the difference in some manner. Buyers get extremely upset at their agents when they have increased the purchase price by $10K and they are only receiving a credit of $8K. Again, the seller can only pay the actual closing costs.
Suggestions to avoid this problem and reduce obvious tension created by having escrow call the parties involved at the very last minute (which by the way, is usually the day or two before closing):
- Have the buyer get a good faith estimate from their loan officer BEFORE determining what the seller credit should be.
- Agents, MAKE CERTAIN that the loan officer knows the amount of the seller credit. If the seller credit will exceed the closing costs, have the difference applied towards a loan discount fee to buy down the interest rate. THIS SHOULD BE DONE WELL IN ADVANCE OF CLOSING DOCS SENT TO ESCROW. (I know many escrow folks may thank us for saying this) 🙂
- The difference CANNOT be used to reduce the purchase price. This would require the loan to go through underwriting again.
- Agents need to understand the ramifications of increasing the sales price and having the seller pay for buyer closing costs that may not meet the intent of the parties.
When this problem occurs the common knee-jerk response by the agents to escrow is “why didn’t I hear about this sooner.” Escrow’s response is typically, “we agree.” 🙂
It is always better to “anticipate” problems that can occur and work through issues including being receptive to suggestions by your loan officers and other real estate professionals rather than being “reactionary” when one is in a pickle that is entirely avoidable.
Note: This is general in context and is written primarily for Washington State
Lynlee, really important reminder. This is important in Phoenix, too, where we’re in a buyers’ market, and so our buyers are able to ask for closing costs to come back. But, as you point out, what is a good idea for an agent to suggest to his buying client can quickly become a lousy idea if the agent hasn’t made sure that all the money the buyer is counting on is actually going to benefit the buyer. If it looks like some of the money that the buyer has rolled up into his mortgage might be left on the table rather than in the buyer’s pocket, your suggestion to apply that difference toward a loan discount fee is a real winner! Not only does our buyer get to hold on to his cash at closing, when a buyer needs cash to throw at all the expenses involved in the actual move, but she gets a gift that keeps on giving each month, with the better loan terms.
Sorry to jump the gun Dustin! I introduced her being from Legacy Escrow Service, Inc. from Washington State to differentiate us from the other companies with the same or similar name in California and across the country.
Please forgive me! She wanted to mention this issue for a long time.
Tim
Lynlee,
I have reduced the purchase price, in fact I did this back in Jan./Feb/ with my first blog client. But you do need the seller’s signature on the new price and you do have to do it early on. No one can guarantee that the seller will in fact sign the new price, so all of Lynlee’s suggestions are great backup plans. If there is an in house underwriter, running it through underwriting again is not a big deal, as long as you don’t try to do it at the last second.
good post! nice blog u have here its usefull. keep it up!