Seller contributions: the right way and the wrong way

Before you go, we thought you'd like these...
Before you go close icon

In slow real estate markets, sellers can get a little creative when trying to sell their homes. Curb appeal, white carpet, new bathrooms ... you name it. Anything to get the property moving. Sometimes sellers will throw in some financial considerations by either reducing the sales price or crediting the buyer some money for closing costs. Or both.

If you're in a selling situation and have thought about paying for buyer's closing costs then there is a key question you must answer: "How much are you willing to contribute to the buyers settlement fees?" But before you answer, you need to know that the buyer's lender places restrictions on the type and amount of seller contributions. The first lender rule places seller contribution limits on how much the buyer has for a down payment. If the buyer has a down payment equal to 0-5% down, a lender will typically limit a seller contribution to no more than 3% of the sales price. Anything extra won't be allowed. And no, you can't give the buyer cash at closing, that's illegal. You can only pay for the buyers closing costs.

Second, as the seller you have to avoid the term "carpet allowance" or "repair allowance" for any amount in the sales contract. If your back deck is in need of $5,000 of repairs, you can't write in the contract "Seller gives the buyer $5,000 for deck repair allowance" or any such language. Yes, you can pay for $5,000 of buyer's closing costs but you can't make for an allowance. Besides, if a lender sees a sales contract that states that your deck is in need of repair, the lender puts on the brakes and stops the loan process altogether until the deck is fixed. At your expense.

Seller contributions are a good way to help move a property, but not knowing how to properly structure a contribution can derail the deal altogether.

Real estate finance expert David Reed is president of CD REED Mortgage Bankers in Austin, TX and author of Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You and Mortgages 101: Quick Answers to over 250 Critical Questions About Your Home Loan.

Read Full Story

Markets

S&P 500 2,204.71 12.76 0.58%
DJIA 19,216.24 45.82 0.24%
NASDAQ 5,308.89 53.24 1.01%
DAX 10,684.83 171.48 1.63%
HANG SENG 22,698.63 193.08 0.86%
NIKKEI 225 18,340.62 65.63 0.36%
USD (per EUR) 1.08 0.00 0.00%
USD (per CHF) 1.01 0.00 0.01%
JPY (per USD) 113.74 -0.11 -0.10%
GBP (per USD) 1.27 0.00 0.14%

From Our Partners