Gainesville, FL · Member since 2013 · 127 posts · 21 votes
I'm selling one of my rental houses by owner. A potential buyer has offered full listing price but his offer is contingent on his getting !00% VA financing and he also wants me to pay $6000 for his closing costs/prepaids. How likely is it that he can get 100% VA financing, and why would he want me to pay $6000 for his closing costs/prepaids instead of just offering $6000 less for the house? If I pay the $6000, will that amount be deductible for capital gains tax purposes?
@Kay March I'm not an expert in VA financing, but I believe that they are allowed to get up to 100% financing with those types of mortgages. As for the closing costs, if you pay the $6k in closing costs/prepaids, that's $6k less he has to pay upfront. However if you just reduce the price by $6k he still has to come up with a bunch of money to close, my guess is either he's trying to save his capital or has little cash to cover closing costs.
Per my lender. No, you cannot use a VA loan to buy a rental property. You can, however, use a VA loan to refinance an existing rental home you once occupied as a primary home. For home purchases, in order to obtain a VA loan, you must certify that you intend to occupy the home as your principal residence.
The house was a rental for me as the seller. The potential buyers would use it as their primary residence, not as a rental. So again, how likely is it that the buyer can get 100% VA financing, and why would he want me to pay $6000 for his closing costs/prepaids instead of just offering $6000 less for the house? If I pay the $6000, will that amount be deductible for capital gains tax purposes?
@Kay March I'm not an expert in VA financing, but I believe that they are allowed to get up to 100% financing with those types of mortgages. As for the closing costs, if you pay the $6k in closing costs/prepaids, that's $6k less he has to pay upfront. However if you just reduce the price by $6k he still has to come up with a bunch of money to close, my guess is either he's trying to save his capital or has little cash to cover closing costs.
@Kevin S. is correct--the VA will go with 100% of sales price (assuming the property appraises). They allow up to 6% of the sales price in a 'seller concession' towards buyer's closing costs. It will net out to you as 6% of the sales price less in other words, $6,000 less, assuming the sale is $100K, or $94K net to seller.
By structuring the transaction this way, the buyer will not have to put down any of their own money to buy/close. Happens all the time. By the way, FHA works similarly as far as seller concession goes, except there is no 100% financing available. Good luck.
Thanks so much, Kevin S. and Marc Winter. The selling price would be $190,000, and the offer specifies that I, the seller, would pay $6000 in closing costs/prepaids (what are prepaids?). So I guess the buyer is not taking full advantage of the 6% allowed by the VA, since 6% of the selling price would be $11,400?
Kevin S., would I pay tax on the $6000, i.e., would it be included in the selling price for tax purposes, or would it be deductible from my capital gain?
@Kay March , not trying to step on @Kevin S. toes, but you will take your 1003 (HUD closing statement) to your accountant who will tell you that you will pay on your 'gross-net' which means, of course, you will NOT pay tax on the seller concession. BTW, if you ever use a broker, make sure to include the disclaimer that no commission is due on any seller concession.
@Kay March , Prepaids refer to escrow for various expenses which typically include taxes and insurance. Most lenders require a minimum of 2 months' "cushion" up front to get the escrow accounts started, and that money is collected at closing. There could also be HOA dues, etc.
They want you to pay the $6K in closing because they have no money and want to 'pocket' some money or not have to pay anything out of pocket for closing costs. You can offer to pay the $6K in closing and have them pay more than list price to compensate for that. Otherwise, you are effectively selling your house for $6K below list price.