Does it matter which loan a buyer uses when asking a seller to cover expenses?

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12/01/2014 | Author: Editorial Staff

I submitted an offer on a home for my client and included the Third Party Financing Addendum for Credit Approval for a conventional loan.

In Paragraph 12A (1)(b) of the TREC One to Four Family Residential Contract (Resale), we wrote that the seller would contribute to the buyer’s expenses not to exceed $1,500. The listing agent told me I cannot put a seller contribution amount in this paragraph because the buyer isn’t seeking an FHA or VA loan. Can the seller contribution apply to a buyer’s expense in a conventional loan?

Yes. The language in Paragraph 12A(1)(b) does not restrict the contribution based on loan type, but does provide an order in which a seller’s contribution will be applied. If there are not any expenses that the buyer is prohibited from paying by a governmental loan program, then the seller’s contribution would next be applied to the other buyer’s expenses as allowed by the lender. Paragraph 12A(2) defines “Buyer’s Expenses.”

Categories: Legal
Tags: loans, legal faq, contracts


Scott Drescher on 12/04/2014

Hey, everyone, some of the answers were a little off target.  As a lender for 22 years, adjunct professor of real estate finance for 12, and MCE author/instructor, I can clarify a few things.  First, the contribution limits are not exactly right.  For conventional, it’s 3% for over 90% LTV (not up to 5% down), 6% for 75.01% to 90% LTV, and 9% for 75% or lower LTV.  FHA is correctly stated as 6%.  VA is 8% total (4% is only for the lender fees).  USDA has no limit.  Next, most lenders do not care about seller contributions in lieu of repairs as long as the repairs are not problematic, so it’s best to NOT state what the repairs are if you feel unnecessarily compelled to write “in lieu of repairs”; however, it’s better to simply remove the contingency at the same time as modifying the contract to include an amount in para. 12.A.1.b, or if you need to write something, just say that the contributions are in exchange for removing the contingency (have a lawyer write it).  There are some narrow-minded lenders who refuse to follow agency guidelines and place additional limits, so avoid them.  These “overlays” as they were correctly labeled follow Fannie/Freddie/FHA/VA guidelines just fine but can be added to the lender’s internal guidelines.

Steve Kelley on 12/04/2014

In a better world, yes, “the purchase price should be close to the anticipated appraised value.”  However, in a market that has ups and downs, the “improved” appraisal guidelines have created a mess.  I have “sold” a number of properties that would not appraise out.  Under the messed up process we now call appraisals, in many instances appraisers actually set the sale price, rather than determine whether there is truly a willing and knowledgeable buyer and willing and knowledgeable seller.  I don’t see why we even need appraisers any more, since all they do is to mathematically calculate numbers with no real judgement.  a computer could do that.

Brian Des Rochers on 12/04/2014

Good point, Jack. However with the proper guidance of knowledgable real estate professionals, the purchase price should be close to the anticipated appraised value regardless of any seller concessions.

The lender will base their loan on the appraised value of the property, so the appraiser provides the “checks and balances” the parties need to ensure a fair transaction.

We successfull close a lot of loans that include seller contributions for closing costs, but your advice is well received. It is always a good idea
to make sure prices are not being padded by adding closing costs on top of the market value.

Credits for closing costs would come out of the total purchase price and not added to the price, so if all parties understand the concept this strategy can help buyers acquire real estate with minimal funds out of pocket.

Chris Tesch on 12/04/2014

I know that I have been unsuccessful getting cash for closing in lieu of repairs before because lenders seem to think the property must have the repairs done to close.  It would take an unusual situation for a lender to restrict a cash contribution otherwise except for the percentage restrictions which I believe are still 2% of sales price for investment, 3% for 5% down and 6% for government and conventional above 5%.

Jack Towers on 12/04/2014

A seller contribution in lieu of a price reduction usually works until the seller adds the “seller contributions” on top of the listed price thus inflating the sale price and jeopardizing the appraisal result.

Lane Mabray on 12/02/2014

thank you, Brian, yes, that is what has always happened, but not this lender. It was USAA, so maybe they have some different in house rules. Caught me and the buyers agent off guard….

Brian Des Rochers on 12/02/2014

Hi Lane, did the lender state why the seller wasn’t allowed to credit the buyer?

Conventional financing currently allows sellers to credit 5% of the purchase price towards the buyer’s closing costs, FHA allows up to 6%, and VA allows 4%. USDA also allows seller concessions for properties in rural areas.

Some lenders may have their own overlays that restrict seller credits, as do some sellers (like HUD). Always check with the lender first to make sure a seller credit is allowable if the buyer needs it.

Closing costs can be expensive, and oftentimes a seller contribution in lieu of a price reduction can be the difference between a successful transaction and being short on funds to close.

If you have any questions please let me know.

Lane Mabray on 12/01/2014

Thank you, Steve and Mark. It was just the first time that had happened and it was at the last minute. The buyer went ahead and closed without his $500, and his agent said “she would take care of it”.  But you are right a good question to ask up front if even then you’ll get a correct answer.

Steve Kelley on 12/01/2014

The problem is not the language in a standard contract, it is that the buyer’s lender always has the final say, and a lot of them either make up their own rules, or just do not understand what they are doing.  When you couple lender confusion with agents lack of understanding or knowledge, it can create a mess.  My experience is that many loan officers do not have a clear understanding of what their own underwriters require.

Mark McNitt on 12/01/2014

Of course they can!  But keep in mind each lender has their own rules and most follow Fannie Mae guidelines if the loan is to be resold.  Many lenders have been having issues with too much closing cost being requested as it can effect the results of the appraisal.  My best advise (buyer’s agents) is to speak with their buyer’s lender and see if they can seek assistance from the sellers and if there is a dollar limit.  These closing cost can help buyers and sellers alike get the home sold!

Lane Mabray on 12/01/2014

I recently closed one last week and the lender on a Conventional loan would not allow the $500 seller to pay via an amendment $500 toward the buyers closing costs.  there must be some new government lending rules. So from now on I am ckg with the buyers lender before.

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