Down Payment Assistance Programs

What are the Disadvantages of Seller Paying a Buyer’s Closing Costs?

By

If you find yourself coming up short on your closing costs, you may ask the seller for assistance. The seller paying the closing costs is common and is even acceptable in many loan programs. However, it may not be the right choice for everyone. Before you jump at the chance to have help with your closing costs, learn the disadvantages of doing so in order to make the right decision.

Compare Offers from Several Mortgage Lenders.

The Seller Isn’t Really Paying the Costs

While it seems like the seller is doing you a tremendous favor by crediting you thousands of dollars at the closing, they truly aren’t paying the fees for you.

When you look closely at the process of the seller paying the closing costs, you’ll see that when you ask the seller for help, he or she agrees to in exchange for a higher sales price. In other words, the seller makes the same amount of money on the sale whether he pays your closing costs or not. When you agree to the higher sales price, you end up taking a higher loan amount. This results in a higher monthly payment, more interest, and more money out of your pocket in the end.

The Appraisal Could be an Issue

If you raise the selling price of the home, the home must appraise for that amount. Anyone could increase the asking price of a home and give seller concessions, but if the market data doesn’t support the value, a lender won’t allow the higher sales price.

If the appraisal comes in lower than the sales price, it puts you right back in the same position. You can either:

  • Walk away from the sale. This is often the best idea since who wants to pay more for a home than it’s worth, right?
  • Pay the difference in cash. If you didn’t have the cash to cover your closing costs, you probably don’t have the cash to pay the difference, so this probably isn’t an option.
  • Negotiate a lower sales price. If you still need help with the closing costs, your seller may not want to lower the price, which could leave you back at square one – walking away from the sale.

Click to See the Latest Mortgage Rates.

The Real Estate Commission Increases

While you don’t technically pay the real estate commission (the seller does), it still affects the bottom line. If you raise the asking price of the home in order for the seller to cover your closing costs, the seller has to pay a higher commission to the real estate agent.

Many real estate agents make between 3% and 5% of the sales price of the home. While 5% on even $5,000 is only $250, it’s still another higher expense the seller and in return, you have to pay for the home. Plus with the seller paying the closing costs, it’s more money out of the seller’s pocket right away.

You May Have Mortgage Approval Issues

Each loan program has different allowances for seller concessions. The FHA and USDA loan allow up to 6% of the sales price in seller concessions. But conventional loans allow different amounts depending on your down payment. For example, if you put down less than 10%, the seller can only give you up to 3% in seller concessions. If you put between 10% and 25% down on the home, the seller can give you 6% back and if you put down more than 25%, the seller can give you as much as 9% back in seller concessions.

Just because the mortgage program allows it, though, doesn’t mean the lender has to approve it. Each lender has their own rules regarding what they’ll accept. You may find lenders that don’t approve of seller concessions or if they do, they limit what sellers can give you. This could make it harder to get your loan approval.

Having the seller paying the closing costs has its pros and cons. Make sure you look at both sides before deciding what to do. The biggest issue is the larger amount that the closing costs will cost you in the end. With the interest on the loan for a possibility of 30 years, you could greatly increase the amount you pay for that ‘assistance.’

Click Here to Get Matched With a Lender.

Understanding Discount Points

By

When you take out a mortgage, you have to lock in your interest rate. It’s a big decision as it affects your mortgage payment and the total cost of your loan. In the process, your lender may offer you the option to pay discount points. Before you jump at the chance, you should understand what they are and how they affect your loan.

Looking for Current Mortgage Interest Rates? Click Here.

What are Discount Points?

A discount point is a fee you pay upfront (at the closing) to lower your interest rate. You may hear lenders say that you are ‘buying down your interest rate.’ You can consider it prepaid interest. Rather than the lender charging you a higher interest rate, they charge you a fee upfront. You pay the interest ahead of time in order to get the lower interest rate.

How Much do Discount Points Lower your Rate?

The question everyone wants to know is how much they will save. This does vary by lender. In general, lenders lower your interest rate by 0.25% for every point you pay. One point equals one percent of the loan amount. If you borrow $200,000, one point equals $2,000 and is paid at the closing.

Again, the exact amount varies by lender. Always ask the details about the discount points. Ask to see both interest rates – the rate without points and the rate with points so that you can make an informed decision. Some lenders may offer the option to pay a full point, half a point, or even one and a half points. Every situation is different.

What do Points do For You?

If you pay discount points, it lowers your interest rate for the life of the loan. As long as you keep the same loan, you keep that rate. You don’t have to pay any fees in the future, either. It’s a one-time fee. Lenders charge it to collect the interest they otherwise would have earned on your loan over its lifetime. The lender comes out the same in the end – it’s you that sees the difference.

Is it Worth it?

This is what you should really focus on – is it worth it to pay points? Looking at it from the surface, who wouldn’t want to lower their interest rate, right? But sometimes it doesn’t make sense to do so.

You should figure out your break-even point. This is the point that you pay back the money paid for the points and start reaping the savings of the lower interest rate. Here’s how it works.

Figure out how much you’ll save on your monthly payment by paying the discount points. Let’s say the difference in payments is $100. Next, determine the exact cost of the points. Let’s say the points cost you $2,000. It would take you 20 months to pay back the money paid for the points:

$2,000/$100 = 20 months

This is your break-even point or the point that you start reaping the savings of the new, lower payment. Use that break-even point to decide if paying the points is worth it.

Click to See the Latest Mortgage Rates.

Think about how long you’ll be in the home. Let’s say you plan to move in three or four years. It may not make sense to pay the fee upfront just to save $100 for a few months or even two years. If you know that this is your ‘forever’ home and you don’t plan to refinance in the near future, paying the points makes sense. You’ll save $1,200 per year on the interest. Add that up over 10 or 20 years and you’ll save a lot of money.

If you aren’t sure of your plans, you may want to skip the discount points, or keep them as low as possible. For example, maybe you split the difference with the lender. Rather than paying a full point, you pay a half of a point and lower your interest rate slightly. This way you still save money and it’s not the end of the world if you end up moving or refinancing in the near future.

Of course, before you pay points, assess your financial situation. Will it hurt you to pay those points upfront? If you need the money for your down payment, closing costs, or just to get into the home comfortably, don’t pay it. You can use the money now and pay the loan down as you can. You can always make extra principal payments toward your loan in the future, which ultimately decreases the total amount of interest that you pay over the life of the loan.

Whether or not you pay discount points is a personal decision. Compare all of your options not just from one lender, but several. This way you can choose the loan that makes the financial sense now and well into the future. Remember, buying a house is one of the largest investments you’ll make in a lifetime.

Click Here to Get Matched With a Lender.

Can Closing Costs be Financed?

By

Closing costs can cost as much as 5% of your loan amount. If you have a $200,000 loan, that’s another $10,000 you must come up with to close the loan. What if you don’t have it? Can closing costs be rolled into a mortgage?

Compare Offers from Several Mortgage Lenders.

It depends. If you are purchasing a home, you may have a tougher time rolling your closing costs into the loan. If you are refinancing your mortgage, you may be able to roll the closing costs into the loan if you have room in the home’s equity.

Does it make sense to do so though?

What’s Your Home’s Value?

The determining factor regarding whether you can roll your closing costs into your loan is the appraised value. Next is the purchase price or the current balance on your existing mortgage, depending if you are purchasing or refinancing.

You can’t borrow more than the home’s value. In most cases, you can’t borrow more than a specific percentage of the home’s value. For example, FHA loans allow you to borrow up to 96.5% of the home’s value and conventional loans allow up to a 95% LTV. If you only put down the minimum down payment, you won’t have room to roll closing costs into your loan on a purchase – this is typical.

If you refinance your loan, though, you may have room. Let’s say your home is worth $300,000 and your existing loan has a balance of $250,000. If you don’t have the cash to pay the closing costs upfront, you may be eligible to roll them into your loan amount since your LTV would only be 83%.

How Long Will You be in the Home?

The next thing to consider is how long you’ll be in the home. Is this your forever home? If so, you may not want to roll the closing costs into your loan for one reason – interest. If you increase your loan amount to cover the closing costs, you pay more interest on the loan itself. If you stretch this out over a 30-year term, you could be paying thousands more than what the closing costs actually cost at the closing.

If you won’t be in the home for the long-term, rolling the closing costs into your loan may not be a bad idea. Let’s say you plan to stay in the home for five years. That means you’ll pay just a small portion of the closing costs, plus the interest on the loan for 60 months. You’ll still have cash in your pocket from the money you didn’t put out upfront for the closing costs and you won’t pay thousands of dollars in interest.

Click to See the Latest Mortgage Rates.

What are Your Other Options?

If you decide that paying thousands of dollars in interest isn’t worth it or you don’t qualify to roll the closing costs into your loan, you have a few other options.

First, you can ask the lender for a ‘no closing cost loan.’ While the name suggests that there aren’t any closing costs, the lender actually pays them for you. No, they don’t do this out of the goodness of their own heart, though. They increase your interest rate in exchange for the lack of closing costs. Typically, it costs you an extra 0.5% in your interest rate to get the lender to cover your closing costs.

You can also ask the seller for assistance. Sellers are able to contribute between 3% and 9% of the purchase price of the home to help you with closing costs. FHA and USDA loans allow up to 6% and conventional loans allow between 3% and 9% depending on the amount of your down payment. Just like wrapping the closing costs into your loan, sellers typically increase the price of the home in order to make enough profit while helping you with the closing costs. It can be a viable alternative when a lender won’t allow you to wrap the costs into your loan, though.

The answer to ‘can closing costs be rolled into a mortgage’ is that you must look at the big picture first. If you are buying a home, your better option may be seller-paid closing costs as there may be more room for opportunity there. The largest factor standing between you and help with your closing costs is the value of the home, though. If there isn’t enough value to inflate your loan amount, then you’ll have to resort to paying the costs yourself or asking friends/relatives for gift money to help you with the costs.

Click Here to Get Matched With a Lender.

How Money Distribution Works at a Real Estate Closing

By

You are ready to close on your loan – it’s an exciting time! As you sit down at the closing table, you may wonder how the money distribution works. Who pays out the funds from the loan? How do they receive the money?

Get Matched with a Lender, Click Here.

Keep reading to find out.

Who Distributes the Money?

First, let’s clear the air. The bank or lender that wrote and funded your loan isn’t the entity distributing the funds. Instead, there’s a third party called the closing agent. The closing agent typically works for the title company. If not, it could be a representative from your attorney. The agent receives the money, typically as a wire, from the bank and handles the disbursement at the closing.

Receiving the Funds

First, the closing agent must receive the funds. As we discussed above, the bank typically wires in the loan amount. But, buyers often have to bring funds to the table too. Buyers must bring a cashier’s check in order for the closing agent to accept it. You can’t bring cash or a personal check. You can also opt to have the funds wired, but you must arrange this ahead of time.

The closing agent or title company will have the appropriate amount of funds to disburse to the appropriate parties. They use your cashier’s check or wired funds to reimburse what they had to put into the transaction. Everyone is aware of the amount of money needed at least three business days before the closing when the Closing Disclosure gets released.

Disbursing the Funds

In general, closing agents pay the sellers’ mortgage company receives first. This payment is crucial in order for the property to exchange hands. The seller’s mortgage lien must be cleared from the property. After the first and any subsequent liens are cleared, the closing agent can disburse the remaining funds.

Click to See the Latest Mortgage Rates.

After the seller’s mortgage company, the closing agent pays:

  • Third parties – There could be numerous third parties involved in the transaction, but in general, there are appraiser, attorney, and title company fees. The closing agent will also pay any necessary government fees, such as tax service or recording fees.
  • Real estate agent – The closing agent will pay the real estate agent from the proceeds of the sale. This money doesn’t come from your loan directly. It comes off the top of the seller’s proceeds. Realtors charge up to 5% of the sales price of the home. The seller and realtor agree on this amount before working together. The closing agent disburses the funds for the seller at the closing so the seller doesn’t have to come up with the funds himself.
  • Escrow account funds – If you are setting up an escrow account (most loans do), you’ll need funds to set it up. At a minimum, lenders require 2 months of taxes and insurance to set up the account. Depending on the due date of the taxes and insurance, though, the closing agent may need more funds to ensure there are enough funds to cover the costs.
  • Paying off any liens – If there are any other liens on the property aside from the seller’s mortgage, those most be paid at the closing too. Property liens transfer with the property, not the person, so it’s often a requirement as a part of funds’ disbursement.

The final funds remaining are for the seller. After all third parties, mortgage companies, and other creditors receive their funds, the seller gets the proceeds. Sellers know before the closing how much they will receive, just as buyers know how much they must bring to the closing. The Closing Disclosure shows both sides of the transaction.

If you have any questions about money disbursement at a real estate closing, make sure to ask the closing agent before the actual closing. The three business days before the closing that you have the Closing Disclosure is meant to give you time to digest the figures and ask any questions you may have.

Click Here to Get Matched With a Lender.