The cooling housing market has prompted many sellers to pay for a buyer's closing expenses to make a deal, but some lenders are now skittish about financing such transactions.
Q: Home sales in our area have been slow, so we followed our real estate agent's advice to offer to pay some of the buyer's closing costs so we could make a fast sale. We got a buyer about three weeks ago and signed a contract that obligates us to provide an $8,000 credit to help pay for his closing costs. The preliminary closing statement we received last week says that his closing costs will total only about $4,500, but his lender will not permit us to give him a check for $3,500 to make up the difference. What can we do?
A: Like you, many sellers in areas where prices have cooled now are offering to pay part of a buyer's closing costs to induce a quick sale.
It's often a good marketing technique to make a house sell faster because it reduces the amount of upfront cash that a buyer must have to complete a purchase.
Many banks, however, prohibit their home buyers from accepting a seller's credit that exceeds the amount of the buyer's actual closing expenses. Several lenders also require that any seller-paid closing credits be used to cover a buyer's one-time-only, "nonrecurring" costs - such as upfront loan fees - rather than premiums for homeowners insurance or other such "recurring" fees that must be paid on a regular basis until the mortgage finally is retired.
Because the bank won't let you make up the $3,500 difference by writing a check to your buyer, the easiest solution may be to simply drop the agreed-upon asking price by the same amount.
For example, let's say you have agreed to sell your home for $225,000 and that you also have agreed to give the buyers an $8,000 closing credit. Because the buyers' closing costs will be only $4,500, you could simply amend the sales contract to reduce the credit to $4,500 and simultaneously cut the sales price to $221,500 to make up for the $3,500 difference.
The arrangement should satisfy the bank's requirement that the seller-paid closing costs ($4,500) do not exceed the buyer's actual closing expenses. It could let your buyer complete the transaction without scrambling for extra cash and also will allow you to reap the same net profit if the terms of the first contract were left intact.
Discuss your options with your real estate agent, your buyers and the bank that is financing the deal. You might also want to consult with a real estate attorney.