Why Seller Credits to the Buyer at Closing Are Not Always a Credit
The Government's Attempt to Simplify Closings
If a HUD-1 wasn't complicated before, it's worse after the TRID regulations dumped HUDs in favor of closing statements and how seller credits appear. It's not only home buyers who don't understand the closing statements with credits, it's bank employees, too, who struggle. Especially a short sale bank which needs to approve the closing statement. The form is so convoluted and awful that many escrow officers have taken it upon themselves to supply a net worksheet, just so all the parties to a real estate transaction can figure out what's going on.
This is progress?
The Problem with Seller Credits to Buyer at Closing
The problem started with the revised Good Faith Estimate. It escalated to the HUD. RESPA decided that if a fee is shown on the Good Faith Estimate but is typically paid by the seller, then it must be reflected on the HUD. To make the HUD balance, if a fee is shown as a credit but it is not really a credit, then it must also be shown as a debit, which makes it a wash. Then the HUD went away, replaced by the closing statement.
Makes you wonder why show it at all? Why? Because it's in the Loan Estimate. I know, it makes you want to pull out your hair. Government regulations will do that to you.
What is a Seller Credit to the Buyer That is Not a Credit?
Let's start with the premise that credits are generally reflected as a plus number and debits are a minus number. If you add $100 and then subtract $100 you have zero.
Second, in many parts of the country, certain closing cost fees are typically paid for by the seller. It is also customary in some areas to split these fees. The problem arises when it is a local custom for the seller to pay a particular fee but that fee is listed on the buyer's Loan Estimate. Examples of those types of fees are:
- Owner's title insurance policy, also known as the CLTA / ALTA Homeowner's Policy.
- Settlement fee, also known as an Escrow fee
- County Transfer Taxes, also known as Documentary Transfer Tax
The above fees, if shown in the purchase contract as a seller-paid fee, would be reflected on the closing statement as a credit from the seller to the buyer. Because these fees are not really a credit to the buyer from the seller, they are then shown as a debit to the buyer, which zeroes them out.
But oh, does this procedure cause everybody, from Joe Blow home buyer to bank executives, to claw out their eyeballs. They are in agony. And we can't fix it unless the government fixes it. If the government tries to fix this, I have a sneaky feeling it will only get worse. So, it seems like this is a Catch 22.
For that reason, I am hoping that this simple explanation of the problem with so-called seller credits to the buyer on the closing statement will cause one less person to repeatedly bang their heads back and forth in a doorway—only because it feels so good when you stop.
Why Seller Credits on the HUD Cause Problems for Short Sale Banks
Short sale banks have guidelines set by investors. These guidelines spell out how a bank can handle approval of fees on a short sale. Some guidelines prohibit credits to the buyer, and some guidelines have a limit on the percentage paid to the buyer.
When a negotiator who is unfamiliar with a closing statement sees a credit noted to the buyer, often this person will demand that the fee is removed. It is difficult to get some people to understand that the fee already is removed as a debit. They can see this in black and white, right in front of their faces, but it doesn't register upstairs. They know only that the seller cannot give the buyer a credit.
An escrow officer or closing agent is not allowed to alter a closing statement. The fees must be shown as prescribed by federal law. Fees can't be shuffled around to suit the whim of a short sale negotiator.
I can send negotiators a RESPA link that explains the rules but many still don't understand. So, if you are one of those people, don't feel bad about your ignorance. Many people are confused and in the same boat as you. I want to say: may it sink, but I am too polite. Because the truth is those fees are not a credit to the buyer.
If you are still confused after reviewing all of this information, it might be a good idea to consider another line of work.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.