Loans not legal because of the ratio of closing costs to loan

[Nathan R. Cowger]

Trying to close a deal on an investment property that is $127k. The market is somewhat competitive so we are paying all closings costs as buyer. We are working with a mortgage company (conventional loan) that is telling us we cannot pay all the closings costs on a small loan (around $100k) because it's not allowed in CO.  Closings costs on investments cannot exceed 5% of the loan amount.  They want us to go back and amend the deal to ask for the seller to pay $2500 so we can make the deal.  We have excellent credit (my father and I) and we both have the money.  We qualify in every other way.  Has anyone heard of this?  I'm told they run into this all the time on loans that are less than $100k. 

[John Teachout]

I guess if the seller doesn't want to pick up any closing costs, you could pay more for the property to wind up at the same place. That's just moving beads around on the abacus but could get the job done.