Home seller credit could save real estate deal

No one likes to give money away, but a monetary credit from the seller to the buyer can solve a problem that might otherwise derail a home-sale transaction. Here's a typical scenario where a seller credit could save the deal.

The buyers are stretching to buy their dream home. Tapped out financially, they panic when they discover during their home inspection that the roof needs replacing. The inspector impresses upon the buyers that the roof must be replaced immediately; it can't wait. But the buyers don't have enough extra cash to cover the cost of a new roof.

One option for the buyers is to back out of the deal, and find another less expensive house, or a house with a roof that's in better condition. But this puts the buyers back in the market searching for a new house. And the sellers have no recourse but to put their house back on the market, and search for another buyer.

Another option is for the buyers to ask the sellers to credit them enough money to take care of replacing the roof. If the sellers are willing, the transaction stays together. The sellers will net less from the sale, but the sale will close. If more time on the market means less money for the seller, this could be an acceptable solution for both parties.

There are other benefits to be derived from this approach to repairing property defects. One is that it relieves the sellers of the burden of having to oversee work while they're in the midst of moving out of the house. Another is that buyers often prefer to oversee the work themselves to make sure that it's done properly. Also, there's often not enough time to have repairs done before closing.

HOUSE HUNTING TIP: Before you ask the seller to credit you money at closing, check with your mortgage broker or loan agent to find out what restrictions your lender might have regarding seller credits. Usually, lenders will only allow a credit for up to 3 percent of the purchase price. Also, most lenders limit the amount of money they'll allow a seller to credit to not more than the amount of the buyer's nonrecurring closing costs.

Nonrecurring closing costs are one-time-only costs that a buyer pays at closing, such as loan origination fees or transfer taxes. Recurring closing costs are those costs paid at closing that are part of ongoing expenses a buyer will pay, such as homeowner's insurance or mortgage interest.

Lenders don't like money to pass from the seller to the buyer if it in some way lowers the amount of the buyer's cash down payment. But they will usually allow a seller credit that offsets the buyer's nonrecurring closing costs. This means that you won't walk away from the closing with a check for the amount of the credit in your pocket. Instead, the seller credit will lower the amount of money you need to bring to the closing. The money you save can be applied toward repairing the property defect.

Seller credits can be useful when buyers are short of the cash required to make an offer. Let's say you have enough saved for a 10 percent down payment. But you are shy the money needed for closing costs. Your purchase offer could include a provision for the seller to credit you an amount at closing to be applied toward your nonrecurring closing costs.

A credit lowers the seller's net proceeds. So, you may need to increase your asking price to cover the amount of the credit if you're in competition, or if the property is attractively priced.

THE CLOSING: Just make sure, before you do this, that the property is likely to appraise at the higher price.

Author: Dian Hymer for Inman News

RESPA Disclosures

One of the purposes of RESPA is to help consumers become better shoppers for settlement services. RESPA requires that borrowers receive disclosures at various times. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers.

Good Faith Estimate of Settlement Costs.

RESPA requires that, when you apply for a loan, the lender or mortgage broker give you a Good Faith Estimate of settlement service charges you will likely have to pay. If you do not get this Good Faith Estimate when you apply, the lender or mortgage broker must mail or deliver it to you within the next three business days.

Be aware that the amounts listed on the Good Faith Estimate are only estimates. Actual costs may vary. Changing market conditions can affect prices. Remember that the lender's estimate is not a guarantee. Keep your Good Faith Estimate so you can compare it with the final settlement costs and ask the lender questions about any changes.

Servicing Disclosure Statement.

RESPA requires the lender or mortgage broker to tell you in writing, when you apply for a loan or within the next three business days, whether it expects that someone else will be servicing your loan (collecting your payments).

Affiliated Business Arrangements.

Sometimes, several businesses that offer settlement services are owned or controlled by a common corporate parent. These businesses are known as "affiliates." When a lender, real estate broker, or other participant in your settlement refers you to an affiliate for a settlement service (such as when a real estate broker refers you to a mortgage broker affiliate), RESPA requires the referring party to give you an Affiliated Business Arrangement Disclosure. This form will remind you that you are generally not required, with certain exceptions, to use the affiliate and are free to shop for other providers.

HUD-1 Settlement Statement.

One business day before the settlement, you have the right to inspect the HUD-1 Settlement Statement. This statement itemizes the services provided to you and the fees charged to you. This form is filled out by the settlement agent who will conduct the settlement. Be sure you have the name, address, and telephone number of the settlement agent if you wish to inspect this form. The fully completed HUD-1 Settlement Statement generally must be delivered or mailed to you at or before the settlement. In cases where there is no settlement meeting, the escrow agent will mail you the HUD-1 after settlement, and you have no right to inspect it one day before settlement.

Escrow Account Operation & Disclosures.

Your lender may require you to establish an escrow or impound account to insure that your taxes and insurance premiums are paid on time. If so, you will probably have to pay an initial amount at the settlement to start the account and an additional amount with each month's regular payment. Your escrow account payments may include a "cushion" or an extra amount to ensure that the lender has enough money to make the payments when due. RESPA limits the amount of the cushion to a maximum of two months of escrow payments.

At the settlement or within the next 45 days, the person servicing your loan must give you an initial escrow account statement. That form will show all of the payments which are expected to be deposited into the escrow account and all of the disbursements which are expected to be made from the escrow account during the year ahead. Your lender or servicer will review the escrow account annually and send you a disclosure each year which shows the prior year's activity and any adjustments necessary in the escrow payments that you will make in the forthcoming year.