Seller Credit Toward Buyer's Closing Costs in a Short Sale
Most first-time home buyers realize that they need a down payment to buy a home. Lenders make very few exceptions for 100 percent financing. Most lenders want a borrower to have some skin in the game. So, lenders generally require a percentage of the sales price as a down payment.
But we're betting two out of every three first-time home buyers do not know they need closing costs. Why should they? If they've never bought a home before, they wouldn't know about closing costs. All of a buyer's closings are detailed on the Good Faith Estimate, available from the buyer's lender. They cover everything extra a buyer needs to pay such as lender fees, prorations, title, and notary and more.
If a buyer is obtaining a minimum-down-payment FHA loan, for example, the buyer's closings costs can be almost as much or more as the down payment. That's a lot of money to some buyers. If you look at a $200,000 home, closing costs alone could range from $5,000 to $8,000. Buyers say it's hard enough to save up a down payment but coming up with another $5,000 to $8,000 is often impossible.
That's why many buyers ask the seller for a closing cost credit. It's not unusual. However, if a first-time home buyer is trying to buy a short sale, asking for a closing cost credit could be troublesome. That's because the short sale bank will need to approve the closing cost credit. The bank might not approve it, even if the seller agrees because, in a short sale, the bank has the final word, not the seller.
What a Short Sale Bank Will and Will Not Approve
- Short sale cash buyers: First, realize that short sale banks are far more empathetic toward borrowers with minimum down payments. If you are a buyer who is paying cash, you can be rest assured the bank will most likely deny your request for closing cost credit. Why? Because you have cash. Because the bank believes you can afford to put down more cash and pay your own closing costs.
- Conventional short sale buyers without mortgage insurance: If you are putting down 20 percent of the sales price or more and bypassing mortgage insurance, a short sale bank is very unlikely to award a credit for closing costs. Banks view buyers like this as flush with cash. If you have the ability to save 20 percent or more, you can probably pay your own closing costs, too.
- Minimum or no down payment short sale buyers: You've got the best chance of getting closing costs paid by the seller and approved by the short sale bank if your financial resources are limited. Banks seem to understand that buyers who are putting very little down need financial assistance or they can't buy that short sale. Almost every lender will allow a closing cost credit of some amount under these circumstances, providing the sales price is sufficient. That amount is typically 3 percent of the sales price. HUD, for an FHA short sale, tends to allow less than any other lender, though.
How to Improve the Odds of a Seller Credit
The one thing a buyer of a short sale who needs a closing cost credit can do is to pay a reasonable sales price. This means you probably cannot make a lowball offer. In fact, you might have to add the number of your closing costs on top of the sales price to entice the bank to accept it.
This can be a tricky situation because you don't want to pay too much for the home. If you bump up that sales price too far, then it probably won't appraise for your lender. If your lender won't appraise it, you won't get the loan if the short sale bank won't back down. It can become a catch-22 situation.
To make sure you don't run into problems, ask your buyer's agent to give you a print out of the comparable sales. If your sales price falls within the range of comparable sales, then increasing it a little bit to include a seller concession for closing costs might be the little tweak you need to get your short sale offer accepted.