I admit it...I'm not a mortgage lender!! But after almost 5 years in the business, I can tell you a thing or two about loans. This blog is really a "buyer beware," brought on by a situation I encountered this past week.
To begin, I'll tell you a story about my first listing and how the settlement quickly went south for the buyer. What's really unfortunate is that the buyer's agent was his mother. The buyer had asked for a $6000 concession, or approximately 6% of the sales price of the home back in closing cost assistance (mind you, this was in Texas several years ago, where you really can buy homes for around $100K!) My seller's agreed to pay the concession in exchange for a favorable closing date and a sales price slightly over asking. All fairly normal so far, right? Well, we are sitting at the title company, all ready to go and the buyer's agent notes that the seller concession on the HUD is only about $5200, not the $6000 we were supposed to contribute. Well, it all comes out that the lender would not allow a $6000 contribution, the buyer got the max credit he could based on his loan, and the leftover money? well, that goes back to the seller. Of course, the buyer's agent panicked and asked if we could just cut them a check outside of closing (which is absolutely not a possibility - all money changing hands needs to be reflected on the HUD) and the seller walked out of the title company with a check for $800 more than he thought he would...
So what went wrong? Well, first, the buyer's agent did not check with the lender before writing the offer to determine what the maximum seller contribution was for the loan the buyer had applied for. In most cases, this situation can be avoided by knowing the loan limits before submitting an offer. However, in some cases, the buyer may change loan programs or lenders before settlement. This is why it is absolutely imperative that you first, trust your lender to let your agent know when issues come up and second, trust your agent to double check with the lender on items like this. While $800 isn't much, here in the DC/NoVA market, with sales prices a lot higher, 1% of a deal can be thousands of dollars. Make SURE everyone on your team (mortgage, title, and agent) is on the same page!!
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We take care of this problem by writing "The seller shall contribute UP TO $xxxx.xx towards the buyer's closing costs". We explain that the lender does not always allow the seller to contribute the fully agreed upon amount towards their closing costs, and that this phrase is a way of making sure they get as much of it as they can.
Great post. I had a close call the other day too. The estimated closing costs dropped and we had to hunt for things to pay for.
Did you consider having the closing costs cover the Home Inspection? People oftentimes forget that this can count as a closing cost (already paid for, you can still add it to the HUD1 and see if that can be refunded to the buyer. It isn't cash, it is a refund).
Also a buyer's agent can put something in the contract that says "In the event that closing costs are maxed out, the price will be adjusted accordingly." So in theory, the seller would have to accept a $800 price drop (same Net to them). But again, this would have a be done a few days before closing at the latest. You can't just change the price the day of.
I wonder if the buyer has the right to pay their buyer agent an admin fee or just $800. Why not? Sometimes a FSBO might only offer 2% and with a 3% buyer rep agreement, the buyer would have to pay 1%, isn't that a closing cost? If the buyer liked the agent, they might offer to pay the agent instead of letting the seller walk.
Just DO NOT get caught up giving a rebate off the HUD1. If the buyer agent gets that bonus, they can NOT give it back in any creative form.
Great post/warning.
Frank Borges LL0SA- Virginia Broker/ Owner FranklyRealty.com
Blog.FranklyRealty.com Featured in BusinessWeek, CNBC, WSJ etc.
Great point Frank...In the deal I am working now, the estimated closing costs dropped a couple of weeks before closing, so we were able to do 2 things with the money: First, put the home inspection on the HUD and have them get that money back at closing and Second, pre-pay the excess towards condo dues (this was a scenario in which the dues are definitely increasing due to a special assessment, so it really helped the buyers out!)