It’s smart, it’s legal, it varies with loan products, but a full seller assist (seller credit, seller concession, etc) may not be possible with certain properties. Before they met me, a client wanted to purchase a foreclosure in Montgomery County, PA. They were approved for a mortgage, they had the down payment, but their real estate agent said the bank would not provide a seller assist greater than 3% of the sale price, and they needed a 6% seller assist to cover their closing costs. The agent stated that that was out of the question and they could not make the numbers work. Well, they lost out on that opportunity and were referred to me by a past client of mine whom they had been complaining to about the scenario. So what can be done to overcome this problem in the future?
First of all, what is a seller assist? This is becoming more and more common with today’s low interest rates, Pennsylvania’s high closing costs, and the lack of a ton of money saved up by buyers to purchase a home. With most loan programs, you need some type of down payment, unless of course, you are using the VA or USDA loan programs. However, on top of that, your closing costs and what are referred to as prepaids (taxes, insurances, etc) average approximately 5-6% of the sale price. Add that to the down payment and there are many buyers who just do not have 10-15% of the sale price of a home in cash to use towards the transaction. They may have the required down payment, but the rest, sheesh, it’s expensive to buy in PA!
Well, in all types of loans available today, there is a loophole to help with this. It is technically called Interested Party Contributions(or IPC, we real estate agents & loan officers love abbreviations, sorry). This states that “an interested party to the transaction” (seller, agents, mortgage company) is allowed to “credit” the buyer of the home a certain percentage of the sale price to help them pay for allowable closing costs and prepaids. Whew, so what loans allow you to do what?
If you are using a conventional loan to purchase a primary or secondary residence, and you are only putting down the minimum 5% down payment, you are allowed to receive up to 3% of the sale price towards allowable closing costs and prepaids. If you are putting 10% down, the cap increases to 6% of the sale price. Now we are getting somewhere! If you are putting down 25% down, they allow 9%. Now that may be a bit overkill. However, investment properties are capped at a 2% IPC no matter how much you put down which is at least 20% with a conventional loan.
Now, let’s say you are using an FHA loan. FHA requires only a 3.5% down payment. The beauty of this loan product is that they allow an IPC of 6%! Perfect!
To make things even better, the USDA loan provides 100% financing, and they also allow a 6% IPC. This is how I can actually help you buy a home with little to no money down, at all. Check out this previous blog post on my record of helping a client buy a home with just $9.55 out of pocket!
So back to the story. There are a ton of short sale properties as well as foreclosures (bank owned properties) currently on the market. In the eyes of the bank, they feel that if they can get an appraisal for a sale price of a home greater than 3% of the net sale price they receive, they should sell the property for more money. For instance, if a property is listed for $100,000, someone who needs the seller assist may offer $100,000 with a 6%, or $6000 seller assist towards closing costs. Now, all they need is 3.5% down, or $3500. Sweet deal right? However, in the eyes of corporate banks, all they see is that they are netting a sale price of $96,000. If the new mortgage company can appraise that property for the sale price of $100,000, then why would they sell the home for just $96,000. Not recognizing that the reason for the higher sale price is to basically cover the large seller assist, they will not agree to it and will most definitely counter offer with just a 3% seller assist.
So now what? You need that other 3% as you only have $3500 to buy the home, you are short $3000. As stated earlier, the proper term for seller assist is “Interested Party Contribution”. So who else can help? Besides groveling family for the money, which is an option sometimes, there is a better solution. The lender!
The lender, in exchange for a higher interest rate, is able to provide a credit towards your costs. For instance, let’s say the interest rate today is 3.25% (I still cannot believe that is possible). Instead of getting a 3.25% interest rate, they bump it up to 3.75%. For that higher rate, they can provide a credit of $3000. The difference in payment, on $100,000, is only $27.91 a month. How long would it take you to save that $3000? Now you have it, and the cost is ridiculously low, and tax deductible! Problem solved!
So when you need that seller assist, remember that it can come from the seller, or the lender. Make sure you check with the lender to be sure they do not have any internal rules that they must follow. Then get out there and buy a home!