Max Closing Costs Allowed to be Paid by Seller

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Max Closing Costs Allowed to be Paid by Seller

Account Closed
Rental Property Investor · Richmond, VA · Member since 2014 · 2 posts · 0 votes

Hi all -

The mortgage agent who approved me for a conventional mortgage and agreed to have the the mortgage underwritten (he is not the actual underwriter) for a close next week on a rental property just came back to me today to say that he "didn't know that the seller couldn't cover more than 2% of closing costs."

On my current, signed contract, the seller agreed to a flooring allowance equal to 3.7% of the purchase price and closing coverage equal to 4.5% of the sale price.  Are repair allowances treated the same as closing costs?  Can I receive only 2% from the seller total (allowances and closing costs combined)?

Both the property and I are located in Virginia.  The mortgage agent says he won't be able to get me an answer until Wednesday (due to tomorrow being a bank holiday), so my agent and I are trying to prep for contract changes that will minimize the amount of money I need for close and repairs, and maintain the amount the seller is receiving.

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Albert Bui
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
11y
Originally posted by @Brie Schmidt:

I thought the max closing costs were 3%

@Albert Bui might know....

 The maximum allowed concessions on conventional is 3% if the borrower puts down Less than 10%, 10% to 24.99% it's 6% max concession and 9% concession max when down payment is 25% or higher on primary residences.

On non owner properties it max 2% no matter what.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    11y

    Repair credits, and allowable closing costs contributions are two different animals.  You may could change the repair credits to 6.2 %, and closing costs contribution to 2%, but of course you can't get the repair escrow Maloney until the repairs have been done and inspected.  6.2% may be higher than allowed though.  Conventional rules are standard, he should have known this.

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  • Brie SchmidtBusiness Member
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    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
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    I thought the max closing costs were 3%

    @Albert Bui might know....

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
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    When I've encountered this (as a seller) the buyer was limited to 3% for closing costs or the actual costs, whichever was lower. The actual costs were about 2.5%. We also had a significant repair (sewer line). We agreed to split the costs, but did that by increasing the selling price and we (sellers) paid for the repair at closing. Unfortunately, the appraiser only agree to an increase of 40% of the cost of the repair. The buyers were getting a FHA loan and buyer down payment assistance from the county. Our payment for the sewer line did appear on the HUD-1. AFAIK everyone was OK with this since we did close.

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  • Brie SchmidtBusiness Member
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    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
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    I just did a closing with a credit for a roof repair and they added it to the tax credit (we are taxed in arrears) on the HUD because they already had a closing cost credit

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  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @Brie Schmidt:

    I thought the max closing costs were 3%

    @Albert Bui might know....

     The maximum allowed concessions on conventional is 3% if the borrower puts down Less than 10%, 10% to 24.99% it's 6% max concession and 9% concession max when down payment is 25% or higher on primary residences.

    On non owner properties it max 2% no matter what.

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  • Brie SchmidtBusiness Member
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    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
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    @Account Closed so it depends on the down payment amount and loan type.  See above

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  • Barima Opong-Owusu
    Real Estate Professional · Novi, MI · Member since 2012 · 73 posts · 8 votes
    11y

    Are the limits that are mentioned above specific to any one type of loan or do those apply to conventional loans too? I'm been scouring through the HUD handbook to see if there is anywhere it allows for more that 6%.

    I have the money to close with 20-25% down, but I'd like to get what I could back after closing for repairs so that most of my funds aren't locked in to the property as equity. 

    @Brie Schmidt @Albert Bui you two are more well versed in the mortgages than I am so I was hoping you could shed some light on this possibility and the legality in it. The HUD handbook mentioned that sellers can provide more than 6% of sale price if its an inducement.

     "Certain expenses paid by the seller and/or another interested third party on behalf of the borrower are considered “inducements to purchase” and result in a dollar-for-dollar reduction to the lesser of the sales price or appraised value of the property before applying the appropriate loan-to-value (LTV) factor."

    These expenses include:

    ? contributions exceeding 6% of the sales price

    ? contributions exceeding the actual cost of prepaid expenses, discount points,

    and other financing concessions

    ? decorating allowances

    ? repair allowances

    ? moving costs, and

    http://portal.hud.gov/hudportal/documents/huddoc?i...

      I'm interested in getting my first rental and this would really help me get it and get things running the right way.  As long as the seller still nets their desired amount is it possible to adjust the price up to account for the credits as long as the property can still pass the appraisal?

    Thanks in advance for any light you can shed on this topic

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  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @Barima Opong-Owusu:

    Are the limits that are mentioned above specific to any one type of loan or do those apply to conventional loans too? I'm been scouring through the HUD handbook to see if there is anywhere it allows for more that 6%.

    I have the money to close with 20-25% down, but I'd like to get what I could back after closing for repairs so that most of my funds aren't locked in to the property as equity. 

    @Brie Schmidt @Albert Bui you two are more well versed in the mortgages than I am so I was hoping you could shed some light on this possibility and the legality in it. The HUD handbook mentioned that sellers can provide more than 6% of sale price if its an inducement.

     "Certain expenses paid by the seller and/or another interested third party on behalf of the borrower are considered “inducements to purchase” and result in a dollar-for-dollar reduction to the lesser of the sales price or appraised value of the property before applying the appropriate loan-to-value (LTV) factor."

    These expenses include:

    ? contributions exceeding 6% of the sales price

    ? contributions exceeding the actual cost of prepaid expenses, discount points,

    and other financing concessions

    ? decorating allowances

    ? repair allowances

    ? moving costs, and

    http://portal.hud.gov/hudportal/documents/huddoc?i...

      I'm interested in getting my first rental and this would really help me get it and get things running the right way.  As long as the seller still nets their desired amount is it possible to adjust the price up to account for the credits as long as the property can still pass the appraisal?

    Thanks in advance for any light you can shed on this topic

     Hi there the above refers to conventional financing keep in mind occupancy type and loan type can affect your seller concessions amount.

    For instance I picked up on the word "investment," that you used. I am not sure if you mean investment as you putting money out of your pocket to purchase or if you mean investment as in you're not going to owner occupy the property but this would affect the amount of select concession you can receive because non owner is max 2% as opposed to owner occupy you can receive much more.

    Reality is most people don't usually receive more than 2-3% in real life anyway, very rare have I seen a  seller concession over 3% unless if it done strategically together between buyer and seller.

    Regarding appraisal value yes you can adjust seller concession up as long as property appraises this is why it's important to understand "value," so you structure your offer correctly. If you know max value is 400k and that is the upper tier that this property will appraise for then you don't want to start your offers around this number if you're planning to get back a seller credit because you won't be able to adjust sales price to 408k and ask for 8k back for instance since the appraisal will flop and you'll be back where you started.

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  • Jesse T.
    Herndon, VA · Member since 2014 · 1k+ posts · 324 votes
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    Generally you will need to put 25% down for an investment property.  Seller closing assistance seems to be limited to 2%.  If this ties up to much cash, look for a cheaper property(or better price).

    In addition to the cash for acquisition, you also will need money for repairs and carrying costs until a renter is found.  While it may end up being more money than you want to have tied up, the cash should start coming back when you have a renter.

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  • Barima Opong-Owusu
    Real Estate Professional · Novi, MI · Member since 2012 · 73 posts · 8 votes
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    @Jesse T. I didn't say I need help with closing costs, its more about keeping the funds liquid.  The same reason some investors try to refinance after a year to pull out some of the equity.  I plan to hold on to this for a long while so I'm not as concerned about market fluctuations.

    Thanks for answering my question @Albert Bui that's exactly what I was looking for.  If I have the funds on my own to close and don't need closing help.  As long as the property will appraise for the adjusted value I should be able to get some of the money as repair credits or as allowances as long as the seller agrees given there desired net is the same.  Are these funds escrowed at closing or is a check cut for the repairs depending on the amount?

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  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @Barima Opong-Owusu:

    @Jesse T. I didn't say I need help with closing costs, its more about keeping the funds liquid.  The same reason some investors try to refinance after a year to pull out some of the equity.  I plan to hold on to this for a long while so I'm not as concerned about market fluctuations.

    Thanks for answering my question @Albert Bui that's exactly what I was looking for.  If I have the funds on my own to close and don't need closing help.  As long as the property will appraise for the adjusted value I should be able to get some of the money as repair credits or as allowances as long as the seller agrees given there desired net is the same.  Are these funds escrowed at closing or is a check cut for the repairs depending on the amount?

     For closing cost concessions then  it's paid directly at escrow close if youre asking about repair holdbacks your entering a territory that conventional fha and va lenders don't like because we can sell the paper till you use all the holdback funds and complete the work. Is it possible? Yes, if it's not health and safety related.

    I've seen new home builders do pool construction holdbacks or other give always but not going to fly if it's roof, foundation, black mold etc

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  • Susana Murray
    Jacksonville, FL · Member since 2017 · 2 posts · 0 votes
    9y

    This may be an old thread but I would appreciate an answer. I am in real estate and have an executed contract to purchase a rental property listed in my MLS with 20% down payment. Seller wanted full price so I asked for a concession of $4,000 towards MY own closing costs as Buyer. Seller agreed. This is a bit over the 2% cap on investment loans. A mortgage broker is now telling me that this 2% is not necessarily to cover my customary closing costs but all closing costs including Seller's. I find this assertion a bit strange. Can someone please clarify ?? Thanks.

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  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 644 votes
    9y

    @Susana Murray  The 2% limit is a cap on the amount you can receive from the seller toward YOUR closing costs only.  It has nothing to do with the amount of closing costs the seller is paying.   (The seller is likely paying much more than 2% - most real estate commissions are much more than 2% of the sales price.)  You will probably have to reduce the seller credit to 2%, or you could agree to reduce the sales price by any portion of the $4,000 that's over 2%.

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  • Susana Murray
    Jacksonville, FL · Member since 2017 · 2 posts · 0 votes
    9y

    Thank you. I have received the same explanation from mortgage broker boss. 

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