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Wednesday, January 5, 2011
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15 comments:
anyone know why lenders disallow using seller concession toward down payment?
MM, I think they view it as a reduction from the overall price of the house, not "skin in the game" on the part of the buyer. With less "skin in the game", the buyer is believed (now) to be more likely to default and walk away.
Ace,
ok, tks, though i can't see how $10K less 'skin' ($100K vs $90K DP on a $500K home) skews the default risk by much.
MM,
Why do you care if you get a credit vs a lower price? Can you just apply the 10K to closing costs or does this exceed closing costs?
Va_Investor,
Yes I'm talking about the scenario when seller concessions exceed closing cost. Say you got $20K subsidy but closing cost was only $10K why wouldn't lenders allow using the $10K toward down payment?
though I guess if lenders don't allow this the above scenario would never happen, e.g., the the parties w/should never agree to a concession more than closing cost...
MM,
Seems you have a "6 of one, half-dozen of the other" question/problem.
Take the max of closing costs and reduce sales price by the balance. Yes, you will have less cash in your pocket but you will get it in the lower sales price.
If it's a question of not getting the extra 10 at all, that is a different matter. If the concession is "limited" to closing costs, I would pay extra points and lower my rate (thereby increasing my closing costs) before losing the 10K.
Back in the day, they used to allow "decorator allowances". I once bought a home with 5% down and got a decorator allowance credit of 5% from the seller. In essence, no down payment.
MM-
Although you might think (and possibly be correct) that 90K vs. 100K is essential the same the bank has rules. A long time ago they determined that people who put 20% down are less likely to default, so it is important to them that you actually put 20% down rather than overpaying for the house by 10K and then having the seller put the 10k towards the down payment.
This would be even more obvious if you were doing a FHA loan. To get this loan you would need to put down 3.5% or 17.5K. If you were allowed to pay the owner and extra 10K for the mortgage this would reduce you down payment by ~60% so you would have much less skin in the game.
I guess the main problem is that the banks set up the rules and can't change them. If 10K of help is fine should 15K, 20K, 50K be fine? You could keep on going down this path and I doubt there is a cliff where all of a sudden the risk jumps up. So rather than allow some down payment help they just don't let any.
tks Va_Investor, housebuyer.
i guess we all want banks stick to their rules after seeing what happened.
personally though, the $10K might mean having to pay PMI or not... will cross that bridge when i get there i guess
MM-
I assumed that was the problem. I know this isn't a very fun solution, but I believe after a couple of years once you have paid down some of the principal you can pay for the bank to do a new appraisal and get rid of the PMI.
It may be worth trying to get the 10k from a different source if possible. Because the PMI is on the entire loan if you can borrow 10K from just about anywhere it will be worth it. Although the bank won't be happy about a new loan so if you credit score is not very high this may not be a good idea.
hb,mm
You are right hb. It appears that mm is trying to build the dp into the loan. At least an underwriter would see it this way. You used to be able to do this and now you can't.
I had assumed the cash was available but just didn't want to be put into the house. This may still be the case. If I were MM I wouldn't want to get too thin on reserves either.
I've paid alot of pmi in the past. We always used to put down as little as possible. We wanted $$$ available for other opportunities or emergencies. The cost was worth it to us. It wouldn't be now.
I thought the answer to this was much more simple. If there's that much money available to "pay back" the buyer, than the house is being sold for an inflated price and it could constitute fraud.
I seem to recall this happens a lot with developers. They try like mad to keep sales going forward the same or higher than previous sales. But at some point they have to drop the price (if throwing in free upgrades isn't enough) because they can only legally credit so much money back to the buyer.
Take the example to an extreme, you agree to buy a house for $200k and you have $20k down. So you get a loan for $180k. The seller agrees to give you $100k back.
Great! Now I have $120k equity in the place.
But really, why does the seller have to pay you $100k to close that deal? Is the house only worth $100k?
Hey Mr Seller, I'll do the same for only $95k back. Do we drop the sale price to $195k or am I saying the house is worth $105k?
I'm just rambling now...
My $0.02
mytwocents-
In theory the appraisal is supposed to say whether you are overpaying for the house. Although I am sure you are correct that banks are also do this as a way to protect their interests if the appraisal is wrong.
Banks are highly suspicious about money changing hands between involved parties. Can seller's still contribute 6% to buyer closing costs? How are real estate agent rebates treated? I am having trouble selling a property to a relative eventhough the sales price is the same that I paid. The lender (FHA loan) is requiring 15% down instead of 3.5%.
I don't know the rules anymore.
Kickbacks are not allowed. Everything must be on the hud-one. If $$ changes hands outside settlement it constitutes Bank Fraud.
btw - my relative's lender got an appraisal 10% over purchase price and they still require 15% down because we are related.
FHA instituted the 3 month rule on it's appraisals. Financing on some flips is restricted based on time-frames and type of financing.
The type of kickback mytwocents talks about has always been illegal.
RE fraud is as old as the hills (straw purchasers, silent seconds, under-the-table $$). Banks are doing whatever they can to catch the most obvious.
Perhaps MM's house is worth 600K? A bank will only lend based on purchase price (or appraisal, whichever is lower).
http://franklymls.com/DC7294441
60% off
I'm a little late on this thread, but in our case we only put down 10% and got out of PMI by paying extra points. We got an 8.5k seller concession plus 1.5% back from Redfin, so we were able to apply all that to the closing costs and got out of PMI that way.
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