What's the deal with seller help? I think I paid too much!
I recently read a blog that was pointed out to me by Margaret Rome regarding seller concessions. Basically the writer wanted information on seller closing help and what it was allowed to cover. He was concerned they had paid more than they should have toward the buyer's purchase of his mother's home since prepaid items were paid out of the "closing help".
I have included the official information below from HUD regarding this contribution below.
When I write a pre-qualification letter for a borrower, to ensure there is no confusion, I include the following:
Seller to contribute x percent or dollar amount toward THE BUYER’S closing costs and prepaid’s to include: lender fees, title fees, and buyer’s portion of transfer and recordation taxes and any and all fees incidental to the purchase.
We have found that this line eliminate a frustrated seller at closing.
The following is the generally accepted explanation for seller contributions on most loans although the maximum allowed differs by loan type:
Mortgage Credit Analysis for Mortgage Insurance on One to Four Family Properties - HandBook 4155.1 (3rd .pdf link) Section 2, Items 1-7 A & B (page 12)
1-7 A. Seller Contributions. The seller (or other interested third parties such as real estate agents, builders, developers, etc., or a combination of parties) may contribute up to six percent of the property's sales price toward the buyer's actual closing costs, prepaid expenses, discount points, and other financing concessions. Contributions exceeding six percent of the sales price or exceeding the actual cost of prepaid expenses, discounts points, and other financing concessions will be treated as inducements to purchase, thereby reducing the amount of the mortgage. Closing costs normally paid by the borrower are considered contributions if paid by the seller. Inducements to purchase are described in paragraph B, below.
The six percent limitation also includes seller payment for permanent and temporary interest rate buydowns and other payment supplements, payments of mortgage interest for fixed rate and GPMs only (but not principal), mortgage payment protection insurance, and payment of UFMIP.
Fees typically paid by the seller under local or state law, or local custom, such as real estate commissions, charges for pest inspections, fees paid for trustees to release a deed of trust, etc., are not considered contributions. The dollar limit for seller contributions is calculated by using Attachment A on the HUD-92900-PUR/HUD-92900WS. Each dollar exceeding FHA's six percent limit must be subtracted from the property's sales price before applying the appropriate LTV ratio.
1-7 B. Inducements to Purchase. Certain expenses (beyond those described above) paid on behalf of the borrower, as well as other inducements to purchase, result in a dollar-for-dollar reduction to the sales price before applying the appropriate LTV ratio. These inducements include decorating allowances, repair allowances, moving costs, and other costs as determined by the appropriate HOC. We also require dollar-for-dollar reductions to the sales price for excess rent credit (see 2-10 N), as well as for gift funds not meeting the requirements stated in Chapter 2.
Personal property items such as cars, boats, riding lawn mowers, furniture, televisions, etc., given by the seller to consummate the sale result in a reduction to the mortgage. The value of the item(s) must be deducted from the sales price and the appraised value of the property (if not already done so by the appraiser) before applying the LTV ratio. However, certain items, depending upon local custom or law, may be considered as part of the real estate transaction with no adjustment to the sales price or appraised value necessary. These items include ranges, refrigerators, dishwashers, washers, dryers, carpeting, window treatments, and other items as determined by the jurisdictional HOC. That office determines if these items affect value and are considered customary. Replacement of existing equipment or other realty items by the seller before closing, such as carpeting or air conditioners, does not require a value adjustment provided no cash allowance is given to the borrower.
In addition, if the seller or builder of the property agrees to pay any portion of the borrower's sales commission on the sale of the borrower’s present residence, the amount paid by the seller or builder is an inducement to purchase and must be subtracted dollar for dollar from the sales price before the LTV ratio is applied. Similarly, a borrower not paying real estate commission on the sale of a present home constitutes a sales concession, if the real estate broker or agent is involved in both transactions and the seller of the property purchased by the borrower pays a real estate commission exceeding that typical for the area. In these situations, the amount paid by the seller above the normal real estate commission is considered an inducement to purchase and must be subtracted from the sales price of the property being purchased before applying the LTV ratio.
Please note: VA allows 4% seller concessions in addition to closing costs and prepaid items.
What's the deal with seller help? I think I paid too much!
Bridget McGee Maryland Mortgage Mama NMLS# 196068 SWBC Mortgage. 410-960-2061 EHO firstname.lastname@example.org or www.marylandmortgagemama.com
If you are considering purchasing a home in Maryland and want to be sure you are mortgage ready, my brother Tony and I will be happy to help! We help to make the mortgage process a pleasure!
If you already own your home, we are happy to provide a no-cost mortgage review to help you to determine if refinancing may be in your best interest. Please contact me at 410-960-2061.