I frequently blog about using “Lender Credits” to help cover closing costs, including this blog from September.
Closing cost credits are often necessary to help cash-starved borrowers close transactions, as total closing costs can easily exceed $10,000 for even inexpensive homes, depending on transfer taxes and other fees local to a particular county.
Agent Credits For Closing Costs Allowed
Real estate agents can offer credits for closing costs as well, but they can only offer their commissions from the transaction and the credits cannot exceed the total amount of closing costs.
Seller Credits For Closing Costs
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 an open reference to a needed repair in an “as is” contract will arouse underwriter concerns that could delay 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).
Closing Cost Credit Rules Of Thumb/Reminders
- 3% of Purchase Price. While many loan programs allow for closing cost credits of up to 6% or even 9% in some cases, many lenders have overlays that restrict closing cost credits to only 3% of the purchase price (or 2% in the case of an investment property purchase).
- Can’t Exceed Closing Costs. Closing cost credits cannot exceed total closing costs, or they end up just getting wasted. This is particularly important to remember if more than one entity (seller, lender and/or agent) is offering a credit.
- Both Nonrecurring and Recurring Closing Costs. Closing cost credits can cover both nonrecurring closing costs (one-time fees such as title, escrow, appraisal, credit, underwriting, etc.) and recurring closing costs (interest, property taxes, insurance, HOA dues).
- Check With Lender. Before negotiating closing costs credits, agents should check with their lender to (a) to ask about the maximum allowable credit as a % of the purchase price; (b) to ask about the total estimated closing costs to ensure the credits do not exceed that amount; and (c) to ask about other closing cost credits that may already be in place from the lender (if a lender is already offering a $10,000 credit, for example, there will often be little room for a seller or agent credit).
- Credits Before Loan Docs Are Drawn. Sometimes agents negotiate for repair credits shortly before close of escrow for a variety of reasons (inspections just came in; sellers might be more willing to bend just to close on time; etc.). But, lenders need to know about all credits before they send out Closing Disclosures (CDs) or draw loan documents. If credits surface after CDs and/or loan documents are drawn, lenders have to start the CD/doc drawing process over, both costing them money and delaying closes.
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