Make Sure Those CONTRACT Credits Become CLOSING Credits
Posted: under Buyers, Uncategorized.
Tags: Closing Credits
The typical and not uncommon repair or closing cost credits that I’ve negotiated in tens if not hundreds of residential real estate transactions over the last 8+ years have become far more challenging to squeeze onto the HUD-1 at closing over the last year or so as lenders become more restrictive & FHA loans have predominated. So you’ve really got to be asking yourself, will that $10,000 repair credit that sounds great during attorney review go “poof” when the Buyer’s lender sees a preliminary HUD-1??
Buyers love the closing credits because in theory they can still borrow say 96.5% of the contract price while using the credit to lower their bottom line owed (simply they can borrower more and owe less at closing). For example, on a $100,000 purchase Buyer can borrow $96,500 and then that $2,000 repair credit would leave a Buyer needing only $1,500 to close (leaving aside other closing costs for the sake of discussion). Of course you could simply drop the purchase price to $98,000 but then Buyer’s loan amount gets lowered to $94,570 and Buyer owes more at closing versus the $2,000 closing cost credit example above (of course long term Buyer’s paying less on his loan over 30-years but sadly the issue is usually the short term matter of $$$ to close).
So that’s why Buyer’s love credits, Mo’ Money; but the flip-side for lenders is that the “credit Buyer” example above has less skin/money in the transaction and thus is viewed as the riskier borrower. And that becomes the trick, if lenders won’t let a credit be listed on the HUD-1, how do you make sure a Buyer still actually gets credit for that agreed upon contract credit at closing. The greatest challenges lies in transactions, notably FHA loans, where a Buyer can’t put too much money down yet she MUST invest 3.5% of the purchase price into the transaction.
What to do? Here are 3-4 tools to keep in your real estate closing bag of “lawyer tricks”…
1. Hide the Credit Somewhere Else on the HUD-1. This is the easiest and the most frequently used solution and typically done in one of two ways. First, Buyer’s “closing credit” gets added into Buyer’s real estate tax reproration credit. When there’s a smallish Buyer’s credit of say $2,000 or less this is almost always the preferred solution and I’ve never seen a lender bat-an- eye. Second, if you need to find to find a few more bucks, then some of Buyer’s costs should get moved over to the Seller’s side…mortgage interest, lender fees, etc.
2. How About a 203k loan? I’m going to write an extensive post on 203k loans upcoming…this is a HOT area right now. I think I represented one 203k Buyer over the first seven years of my legal career and have represented five 203k Buyers in the last 6 months. What is it? Simply, a Buyer can borrower more than a property’s current value in order to fund remodeling/repairs. So if you really need a big repair credit at closing, why not dial 2-0-3-K?
3. Have Seller pay Buyer’s Contractor Directly. I wouldn’t recommend this option but I did see this happen recently. Parties got to closing and Buyer’s lender wouldn’t let a large repair credit show on the HUD and Buyers couldn’t close without those dollars. Long story short, item #1 (above) was used to the point that it could be used, but a good chunk of the agreed upon credit was still outstanding. Seller ended up agreeing to quietly pay credit to Buyer’s contractor to complete the repairs…not sure about legality here but I’m just sayin’ I’ve seen it done to close a deal.
Or just don’t buy a property that you can’t afford…sometimes that’s the critical issue. If you’re squeezing for $$ too much just to close you may be asking for a disaster like here. Remember, if Buyer’s lender ostensibly won’t cooperate on this issue at closing that’s not the Seller’s problem and between Buyer/Seller if Buyer can’t close w/o the credit the Buyer likely is in a breach of contract scenario.
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Feb 06 2010
