Many homebuyers can get credits for closing costs in lieu of credits for repairs. Sellers are often unwilling to credit anything in hot markets, but sometimes closing credits are necessary to employ in lieu of repair credits. This is because if credits are for repairs, underwriters will require that they be completed prior to close which could cause delays or even kill a transaction. For example, if an underwriter sees a $10,000 credit for “roof repairs,” she will call for a roof inspection and a certification that says all necessary repairs have been completed to give the roof an adequate remaining “useful life” of 3 to 5 years (depending on lender/loan type).
As such, it’s easiest on the lending side for the credit to be referenced on a simple RPA (Residential Purchase Agreement) addendum stating that there is a seller credit for “X” amount to be applied towards closing costs.
Guidelines For Seller And Lender Credits
Seller credits can be as much as 6% of the purchase price for owner-occupied properties (and even higher in some cases), and up to 2% of the purchase price for investment properties.
If a credit is specified to be for a repair either in the contract or addendum, the repairs will have to be completed prior to close of escrow. We will need to show proof they are complete, with either an appraiser’s or licensed contractor’s certification.
Credits for closing costs cannot exceed actual closing costs. Seller credits can cover both recurring (interest, insurance & property taxes) and non-recurring (title, escrow, appraisal, etc.) closing costs. Credits cannot ever exceed actual closing costs, however, or they simply go unused. So buyers should always get an estimate of total closing costs before negotiating large credits.
Credits can be for non-recurring and reoccurring closing costs. Seller credits can cover both recurring (interest, insurance & property taxes) and non-recurring (title, escrow, appraisal, etc.) closing costs. There is no need to specify which. Credits can simply be for “closing costs.”
Closing cost credits should be on a separate addendum, and not on a “Request for Repairs” addendum. It is well known that Realtors substitute “closing cost” credits for “repair” credits, to avoid disclosing repair issues. But, this should not be made too obvious by putting closing cost credits on a “Request for Repairs” addendum (even if the Request for Repairs addendum does not specifically note any repairs).
Make sure there are no large lender-credits in place already. Credits cannot ever exceed actual closing costs, however, or they simply go unused. So buyers should always get an estimate of total closing costs before negotiating large credits. We recently had a transaction grind to a halt because the selling agent negotiated a seller-credit for closing costs without knowing that we had already given the buyer a large lender-credit. As a result, the total credits exceeded closing costs, and we had to restructure.
And lastly, the addition of closing cost credits does NOT require a new Closing Disclosure (CD), nor does it require a new three day waiting period. If closing cost credits are increased or added, we want the info before we order loan documents because we have to run the updated info through our Automated Underwriting System (AUS) before documents are drawn. However, if we do not find out about a credit until after docs are drawn, or until after signing, we can still add it in—though we will need some extra time “prior to funding” for the file to go back to underwriting for the AUS to be re-run.To prevent delays at funding and to ensure that the credit is not too high, we want to have all updated credits and related info at least a week prior to close.
To learn more about seller credits, closing costs, or how you can get pre-approved, secure a low mortgage rate, or anything related to the home loan process, you can contact our expert team of Mortgage Analysts. Our team is available 7 days a week by phone at (855) 855-4491 or by email at jvmteam@jvmlending.com.
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