For those of us familiar with the real estate sales process we know that it is very common for buyers to request that the seller pay all or a portion of their settlement charges. This reduces the amount of cash they have to bring to closing. Especially for first-time homebuyers who often do not have a lot of cash this is an important flexibility to make deals work.
Countrywide, one of the nation’s largest mortgage lenders announced today that they would no longer accept addendums to sales contracts where the buyer and seller are increasing the sales price in order to include seller paid settlement charges. Their concern is that the increase in price & loan amount are not dully backed by the market value of the property and therefore leaves them exposed to equity that does not actually exist.
Here is an excerpt from their announcement on what is acceptable and unacceptable:
SELLER CONCESSIONS (Question & Answer ): For now this guideline only exists with Countrywide. However, love them or hate them they are a bellwether in the mortgage industry and are probably only following the guidance that Wall Street is giving them. It is reasonable to assume that other lenders will likely follow in their lead over the next weeks/ months.
Q – Buyer and Seller are going back and forth counter-offering the purchase agreement. Initially the sales price offered was $300,000 w/no seller paid closing costs or prepaids. This amount was never agreed upon, but a counteroffer was made to a sales price of $303,000 w/the sellers paying $3000 in closing costs and prepaid. This is accepted by the seller and set as the terms of the transaction. I believe that this is an acceptable transaction.
A – Correct. And the closing costs paid by the seller must meet the 3, 6, or 9 percent limitations as usual.
Q – Buyer and Seller are going back and forth counter-offering the purchase agreement. Initially the sales price offered was $300,000 w/no seller paid closing costs or prepaids. This price is accepted by the sellers. Later the transaction is amended to request a change in the terms to a sales price of $303,000 w/the sellers paying $3000 in closing costs and prepaids which. This is accepted by the seller and set as the terms of the transaction. I believe under the CW policy this is NOT an acceptable transaction.
A – Generally correct. There may be times when the contract is final and then re-negotiated, e.g., a new home and additional upgrades being added, so that an increase in the price actually makes sense, there is a value add on both sides. In your example above, there doesn’t appear to be a reason for the seller to raise the price other than to cover the costs, so the borrower is technically paying his own costs and potentially increasing his property tax liability for no apparent reason. This is particularly a problem if the contract is final, the appraisal comes in high and then there is a subsequent increase in the purchase price and agreement for the seller to pay closing costs or to pay more…it would appear they were gaming a bit and this is unacceptable.
The lesson for guiding buyers and sellers through this is to ask buyers UPFRONT if they will need any seller paid settlement charges. This is another reason why we think it is important that your buyers meet with us PRIOR to going out and writing an offer on a home. We can sniff these needs out before it becomes an issue. Let us know if you have any scenarios or questions you’d like us to review.