I'm grateful for seller contributions! I've been on both sides of the table - working with buyers who need seller down payment and closing cost assistance to be able to purchase a home and with sellers who give concessions in order to sell their home. In the current mortgage climate, more and more buyers are using FHA financing and more and more sellers are making contributions to the buyer's closing costs.
To protect the buyer and seller the following items should be capped or excluded from the closing cost concessions:
- Origination Fees
- Brokerage Fees
- Real Estate Transaction Fees
- Processing Fees
- Administration Fees
Why? These fees are often escalated based on the amount of the concession in order to "use up" the contribution from the seller. It keeps everyone honest and it prompts the buyer to be more concerned about the closing costs, instead of detached because the "seller" is paying them.
I'm not trying to throw mortgage brokers under the bus... but I've seen fees rise on closing statements just because there was "extra" money left over.
Last week I witnessed a REALTOR instruct the title company to charge a $575 transaction fee on the settlement statement, after they had already reviewed several drafts and had never informed the title company that their company was collecting a transaction fee... I almost fell out of my chair... Did the buyer say a word at closing (the cost was reflected on the seller's side of the settlement statement), NO...but did they escalate the price to cover their closing costs, YES... So were they really paying that fee... YES.
Be specific about the costs, do the right thing for the buyer and the seller!
Debbie Summers, REALTOR®, ALHS, e-PRO, 407-758-1020 or Debbie@CasAndDebbie.com
Please contact Cas and Debbie for all of your real estate needs in Seminole County, Lake Mary, Sanford, Longwood, Altamonte Springs, Casselberry, Winter Springs, Oviedo, Winter Park, Apopka and Orlando.
Debbie~ I would agree! It seems as though if it's not specified, those who are are given the opportunity to take advantage of a situation CAN and WILL unless we cap fees as you have suggested. You are a great REALTOR and it shows!
Debbie- Unbelievable....not unheard of, but still unbelievable. Thanks for the info, I haven't experienced this, but sure wouldn't be happy if I did.
LaShawn - I've seen it first hand, it was shocking. With fewer and fewer transactions, some take advantage of those who don't know how to protect themselves.
Thank you for the kind words, they mean a lot to me coming from you.
Debbie,
I am offended by this post. You stated: "I'm not trying to throw mortgage brokers under the bus... but I've seen fees rise on closing statements just because there was "extra" money left over." When it was a Realtor's actions which prompted you to make this post.
If you witnessed a Realtor charging a false transaction fee it is your ethical obligation to report what you witnessed. Especially, if you are willing to post it on the World Wide Web. Sounds like a crooked Realtor.
As to your hypothesis. If you limit or exclude Origination Fees, Brokerage Fees, Real Estate Transaction Fees, Processing Fees, Administration Fees from the closing concession you may be shooting yourself in the foot. The buyer is already straped (after all he needs concessions) by paying the 3% required down payment? Where is the buyer going to get the money to pay these fees? Do you think the Realtors would be willing to pay them out of their commission? After all, if the buyer can't pay the originator there is no money to close the loan.
FHA limits the amount of what can be earned on a loan. When things come up that have to be paid and are limited by the contract make sure you are willing to pay those fees out of your commission. Because most lenders are not going to do a loan for free. If the contract is too specific your may find that the FHA limitations will make it impossible to do a loan. If you want to recommend that people limit or exclude specific fees you need to read and familiarize yourself with FHA guidelines.
Jimmy -
I didn't say that the transaction fee was false, the transaction fee was only the beginning, it could be their standard transaction fee... I don't know, they didn't provide documentation, but I've seen higher. That just doesn't make it right.
I'm very familiar with FHA mortgages, I have another seller closing today who offered 3% down payment and 3% closing cost assistance and I have a buyer closing Monday who is also receiving 3% in down payment and 3% in closing costs. The buyer who is closing on Monday is paying a $650 administration fee to the lender (nothing else - no brokerage fee - no loan origination fee - no processing), the buyer who closed last Friday paid $6,192.18 in fees to the broker for almost the identical mortgage amount... BIG Difference.
I didn't include this in the post because I didn't want the focus on mortgage brokers, I believe that everyone needs to be paid for the work that they perform, but.... escalating fees to use up a concession isn't what the purpose of the concession was, it was to pay the loan closing costs, the mortgage insurance premium, pre-paid taxes, etc....
I'm sorry that you were offended, but I would imagine that you try to provide customers with the best value for their money and care about your customers as much as I do. I'm just trying to help others learn from my experience.
I would have been happy to see a discount point for the buyer to get a lower rate, that would have been a benefit to them... these fees didn't benefit them or their pocket book.
Good points in post and in the comments. These fees are potential landmines... especially when they creep into the fiduciary duty zone.
Chuck- Thank you for taking the time to comment... It is a delicate topic and I'm not trying to say that all REALTORS or Lenders do these things, but having experienced it... I thought that it was good information to share so that others could learn from it. I know that I'll be asking a lot of questions of the next buyer who asks for closing cost assistance.
Debbie, As a listing broker I counsel my sellers to always get a precise figure when it comes to contributions. I get many offers stating "up tp 3%". My sellers willnever agree to that. We will agree to 3% but not up to. The reason of course is because we know that whatever it is "up tp " will get spent anyway so let's just make it precise from the get go. From that point on we don't care what the buyer spends it on. We just know it's going to be 3%, no less, no more.
Debbie,
No need to shout. I might be offended by your post but I understand your rational for writing what you wrote. Fees can get out of hand, you owe it to your clients to catch them, and it is unfortunate that some people take advantage of the sellers concession by pocketing it. But, if you start getting specific you can kill the deal. A flat cap is the best route.
I was offended because you are giving blanket advice that does not work in every case. Realtors on both sides have NO idea of the buyers financial situation at the time they write an offer. Loans are specific and sometimes the numbers have to moved around to make the deal work. You gave three examples of similar FHA loans (response to my comment) and claim there is a big difference. I would love to evaluate the HUD 1 on these 3 loans. I bet there is not as big a difference as you think.
Being familiar with FHA Mortgages as a Realtor and a lender are to totally different arenas. If you knew the lender guidelines you would never advice your clients to restrict the contract of those fees. If I am wrong please show me. I ask other Realtors and Loan Officers to show me why it is better to restrict and exclude fees than to have a flat cap on seller concessions.
Debbie - A better way to handle seller concessions towards closing costs is to apply it towards points to bring down the rate on the mortgage. Say the seller agrees to a 3% seller concession. Have the mortgage lender apply that 3% to 3 points so the buyer gets a lower rate. There will still be money left over to apply towards closing costs because the seller's 3 points is based on purchase price, and the buyer's 3 points is based on mortgage amount. In the case of FHA with little or no down, through, there won't be much left over, so you could use say 2% to buy down trhe rate, and the remainder towards closing costs. That way there's no "adding on of fees" to use up the money. They buy pays less on his mortgage per month, and will save a lot of money in just a few short years. If you (or anyone else who reads this) would like an analysis of what I'm talking about, contact me by email or phone, give me a scenario, and I'll work it up for you. It won't be anything fancy, but you'll see what it will do for your buyers.
Debbie,
I haven't run into the situation you describe. That's problematic, to say the least.
When the contract calls for 3% or a dollar amount of seller concessions my goal is to apply all of that to what gives the buyer the most bang for the dollar. If that is a loan buydown then that is where we concentrate a larger portion of the funds. Each buyer has different needs. Since I am doing a lot of VA loans these days I can't charge a administrative fee which in reality I consider a brokerages "junk" fee and I pay it out of my own commission.
Debbie, very good post! I had no idea this type of thing went on, but I am pretty specific about expectations on either the buyer or seller side. I'll keep an extra eye open from now on, thanks to your post. Thanks! ;-)
I just keep it at a flat cap Debbie. My Sellers know the figure and know it's gone.
Debbie: Great point... I always cap my sellers closing cost. Even if we get a perfect offer that is acceptable and the offer only says seller to pay all closing cost....Ect.. Always cap not to exceed _____ to include mandatory seller fees and inspections.
Wow, I never would have thought of that. That was some great advice. I will keep this in mind.
As a broker if the buyer negotiates a seller cost and at the end there is more money left, the seller knows they have agreed to let the buyer have it why shouldn't it get used? If it means I can charge more up front and lower the rate instead of collecting more YSP then it is a good thing for the buyer and the seller is out nothing.
I agree with many on here you cap the amount either py percentage or dollar amount then no one gets upset and the borrower is free to use the money however they think will work best for them.
Just my .02 cents
The majority seems to be looking at this from the buyers point of view. As a listing agent, I always have a dollar cap on closing costs. I had a closing yesterday that was so out of control it was one of the most unprofessional closings I have ever been a party to.
My sellers had agreed up to $4500 in closing costs. (Amount of sale $163,000) The closing was to be at 3:30 PM. At noon, the title company had still not received the closing packet from the loan company. The excuse was they were waiting on verification of the spouse's social security number.(and could they not have done that prior to the day of closing)
Anyway, these sellers are a young couple with newborn having to move due to job change. Had only been in home 2 years. The closing packet came AFTER 3:30 and was changed 3 times after that and they tried to change it again AFTER WE WERE SIGNING PAPERS.
The thing that really infuriated me is they were throwing things in at the last minute to bring the closing costs up to the $4500. My little couple was having to pay monies in to get it closed to begin with. I really lost it when the final HUD came thru and the had credited the buyer back for their home inspection of $375 that they had paid for outside of closing and WAS NOT REQUIRED TO GET THE LOAN. It was not an RHS inspection or and FHA inspection but a full home inspection. Was not a closing cost in my book. My seller also paid for one year of the buyer's homeowners insurance. The loan officer was still trying to add costs to my sellers side and the buyers were happy with the HUD as it was.
As I see it, sellers pay the closing costs to help the buyers GET the loan on the house. I feel they are being taken advantage of when the loan company then takes and "excess" and buys down rates. It is not the buyers money. It is the seller's money they are throwing around.
Appears to be a hot topic. There are professional and unprofessional people in all professions. I agree to:
Key here is #5 - only the lender knows for sure....
I enjoyed reading through the post and all comments. Definitely, it's food for thought. Debbie, have you ever (as a Listing Agent) asked for a copy of the Buyer's GFE during negotiations? Can be very helpful and takes a lot of the guesswork out of the transaction. :) I know one agent here locally that gets the Buyer's GFE along with the pre-approval letter to help determine what the Buyer REALLY needs in terms of closing costs, pre-paid items, and escrowed items.
Very interesting, great posts. Thanks for sharing!
Lisa,
Does the Listing Agent get cooperation or resistance when asking for the BUYER'S good faith estimate? That is truly a great approach. Of course, it helps the buyer too, when everybody knows that all parties are keeping an eye on the bottom line.
I'll bet that the kneejerk, first reaction of a buyer, though, is that the GFE is private information--sort of a protected negotiation between buyer and lender. I wonder how often buyers' agents have actually seen the GFE before the contract proposal is written. Why shouldn't the seller see the document if the seller is paying all/part of the closing costs?
It seems to me that the agent you mention is doing everyone a favor by forcing that document into the forefront. I think I'll try that!
Wow, this one is right on target! You can always use the excess for buy-down points (or fractions) to lower the buyers interest rate if there is money left over. And gee! It never occurred to me to pay the agents more!
Broker Bryant - I agree with you and we did agree to a specific percentage. I knew the money was gone and so did the seller. I was just shocked to see how it was applied, the buyer didn't benefit from the closing cost money... the mortgage insurance was rolled into the mortgage so the lender could collect thousands in fees.
Hey Jimmy... Sorry, didn't mean to shout, I suffer from the over use of bold text.
I knew this was a controversial subject and I understand how FHA works and why it works for the buyers that use it. I learned a valuable lesson from this transaction... There are people out there that don't look out for the best interest of their customers... You and I do... but others don't.
The day of closing I made two notes for myself when a seller is considering an offer that includes closing costs and down payment assistance:
Is it my job to save the buyer from himself... No, but if I don't... maybe no one else will either.
Lewis - I would have loved to have seen the buyer get a lower rate... I applaud your way of thinking!
Diane - I felt so bad for this young couple... They should have been able to buy down the rate or not roll the closing costs that weren't covered (almost $3,000) into the mortgage. They were nice people and deserved better.
Cindy - Sounds like your customers are in good hands!
Debbie, good job on a stimulating post. The RMLS rules in Vancouver / Portland require the listing contract to state specifically that the Commission computation shall exclude Seller Concessions. Yet, the Listing Contract does not have a "check the box" option for this so, we must write that into a listing contract addendum, then explain that in the private agent-only remarks.
John & Kathryn