What Credits are Allowed on a Purchase Transaction?
This article was written by our featured, lending partner, SunnyHill Financial
Fed up with your landlord? Frustrated about rising rents? Tired of sitting back and watching home values soar out of your price range?
It doesn’t have to be that way…
Homeownership rates in the United States have now reached all-time lows in the past 50-years to 63.4% down from a high of 69.2% at the end of 2004, according to data released this week by the U.S. Census Bureau. College students are graduating with a mountain of debt like we’ve never seen before, home prices are at or near record levels across many parts the country according to a report last week by the NAR, the average age for Americans getting married has reached a historic high at 27 for women and 29 for men, and qualifying for a mortgage recently has been compared to having a root canal although lending guidelines have started to ease in the past year. These are just some of the factors that have contributed to the state of our country’s record low homeownership rates.
So how do you get rid of your landlord and into a home faster?
There’s a lot of preparation involved with making yourself appear as best of a credit risk as possible to a lender and we will share our insights into that in an upcoming post. Our focus today is on describing the different ways current homeowners are using interested parties to the transaction to help cover their closing costs on a purchase, and get into that home faster.
Many parties in a real estate transaction are motivated financially to close the deal. These parties include a) the seller who wants to receive their sales proceeds, b) the realtor(s) who want to receive their sales commission, and c) the lender who wants to originate a loan for an investor. All parties will not get paid unless the transaction closes. As a buyer, you may have the opportunity to request for credits towards closing costs from any or all of these interested parties.
Seller Credit: discuss with your realtor on how to structure your offer to purchase so you can request for a seller credit towards closing costs.
Realtor Credit: discuss whether your realtor is willing to offer you a credit towards closing costs. The internet has empowered potential buyers with more information than ever before. More and more realtors are offering part of their commission as a credit to their buyers to compete with growing discount realty firms such as Redfin.
Lender Credit: discuss whether your lender has (higher) rate options available for your specific transaction to generate a lender credit to help cover some closing costs. Review my post last week for guidance on selecting the best rate option given your circumstances.
Keep in mind that there are limitations to the amount of credit you may receive. The following are the guidelines on maximum interested party credits for a Conforming loan, which is a loan that conforms to Fannie Mae and Freddie Mac guidelines and includes loan amounts of up to $417,000.
- Primary residence/second home > 90% LTV = 3% of value.
- Primary residence/second home > 75-90% LTV = 6% of value.
- Primary residence/second home < 75% LTV = 9% of value.
- Non-owner occupied properties = 2% of value.
(LTV = loan amount / appraised value)
In addition to the percentage limits set above, Freddie Mac & Fannie Mae guidelines only allow the buyer to receive credits up to the total buyer settlement charges. Any excess credit amount received will not be allowed without authorization from your lender.
What are the closing costs involved with a home purchase?
The lender is just one of many companies involved with a home purchase. As a buyer, you may have to pay the following settlement charges to the company you selected:
Lender: credit report, appraisal, flood cert, tax service, underwriting, processing, origination/points fees, or escrow reserves for property taxes and homeowner’s insurance.
Title: escrow/settlement/attorney fees, owner’s and lender’s title insurance premium, misc. costs such as wire, courier, recording services, survey, tax search & exam fees.
Insurance: annual homeowner’s insurance premium
Homeowner’s Association: transfer fees, homeowner’s association questionnaire.
Prorated expenses: prepaid interest, property taxes or homeowner’s association dues paid in advance by the seller
City/County/State Recording charges: there may be costs associated with the transfer of title from the seller.
The amount of settlement charges depends on many factors including the property’s location, purchase price and loan amount.