Seller credits for closing costs can make or break a deal (and an agent’s comm check) if negotiated properly.

With listings on the market longer, and falling out of escrow more often, closing cost credits may be negotiated to allow both buyers and sellers to benefit.

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What Exactly are Closing Cost Credits 

1)  A seller’s or lender’s closing costs credit can be for both: “Non-Re occurring” and “Re-occurring Closing Costs” (aka “impounds”).

2) Non-recurring closing costs are one-time fees such as loan fees, title, escrow, appraisal, credit, underwriting, etc.

2a) Buyers should never pay points for a loan unless they need to “buy down” a rate; in order to qualify for the loan; the cost vs reward matrix rarely pencils out,

3) Recurring costs (aka “impounds”) are property taxes (6-8 months), hazard insurance (14 months), and HOA dues.

4) “Reserves” are a factor in closing COE are not closing costs. But “reserves” are required “liquid assets” remaining in a buyer’s personal account after COE. 

Lenders simply want to verify borrowers have enough funds to continue making their mortgage payments in the event of a job loss, medical emergency, or any event that might cause a loss of income.

Reserves can be in the form of cash, stocks, 401k funds, IRA funds, and/or any other relatively “liquid” instrument.

For FHA and VA loans, no reserves are required.

Reserves for Fannie/Freddie Loans

Owner-occupied loans: Buyers must have 2-3 months of total house payments in reserve” in a verifiable account after COE.

The reserves must cover “PITI + HOA + Mello Roos Assessments. 

Investment properties and second homes: The reserve amount increases to 6 months; for each property. In the case of a buyer with multiple investment properties, the dollar figure can run into the tens of thousands of dollars.

“Jumbo Loans”: Typically require 12 months of reserves for each property. 

Rebates are Problematic

Occasionally, agents want to give part/or all of their commission to a close friend or grown child!

1) Rebates from agents to buyers ARE legal (according to CAR’s legal beagles) and are NO longer considered an inducement” and do NOT violate RESPA! That opinion is dated May 18th 2018, found on the CAR website.

2) Negotiate with the Seller “Straight Up”

Homes that have been on the market longer than expected or have fallen out of escrow, only to be relisted, are good candidates for a buyer to negotiate for credit for closing costs.

Note: But, the inherent risk is the appraisal must still support the sales price + the amount for the credit costs. If the appraisal comes in “low,” the negotiations must be restarted, or the deal dies.

3) Reduced Agent Commissions for Buyer Credits

If a home’s selling price is $500k and the selling agent’s commission is 2.5%, the selling agent can accept a reduced commission from the seller (i.e., 1.5%%), and THEN  (instead of 2.5%) the 1% difference can be credited the to the buyer, from the seller DIRECTLY!!!

The listing agent could also structure the same type of concession.

Lender Credits

Many times buyers will take a higher interest rate in return for the lender giving them a rebate credit in the form of closing costs.

Any Credits are for Closing Costs Only

Lenders need to know about all credits BEFORE loan disclosures are sent out and the interest rate is locked!

If more than one entity (seller and lender) are offering credits, it’s essential to coordinate with the lender, so that no “money is left on the table.”

Closing costs credits cannot exceed the total closing costs.

For Example: If the seller offers a 2% credit (i.e., $10k), and the transaction costs only $9500, the other $500 will be wasted.

In the case of a “lender credit,” any excess credits will be applied to the initial loan balance through escrow (which is less than optimal).

Ask your MLO if the “lender’s” credit can be rebated back to the buyer after COE in the form of a check.

Note: Institutional Lenders and the so-called ‘direct lenders will not rebate money outside of escrow, but smaller, more service-oriented “niche” lenders” (independent loan brokers) may be willing to rebate funds.

The rebate outside of escrow is limited to a “refund” of lender “hard” costs, i.e., the cost of the appraisal and credit report processing fees.

Credits for “Repair Items” are “Deal Killers”

When writing up the RPA, many agents initially structure credits for repairs to the home, such as paint, carpet, water heater, etc.

Or, following inspections (and after escrow has been opened), buyers want to re-negotiate to cover repairs. Typically then, an addendum is written up as a credit for “repairs” and given to the lender.

That’s TMI! Full Stop!

Never Reference Credits for “Repairs”

A reference to repairs will reduce the appraisal value or may trigger the need for a new appraisal. Both lead to more costs and more delays to COE.

A reference to a needed repair in an RPA will also arouse an underwriter’s (UW) concerns about the home that will delay or even kill a transaction.

The UW can also (it’s rare) require a buyer to provide a copy of the home inspection report, which can trigger other concerns and mandated repairs.

So, eliminate any reference to repairs in the RPA

And if repair items come up after the inspection, the buyer and seller need to settle the credits between themselves and not involve the lender.

Avoiding Tax Consequences for Agents

After COE, agents who rebate their commissions directly to a buyer are put at risk of a tax consequence.

Typically an agent’s broker, issues “1099s” for gross commissions, leaving the agent to justify any rebate on THEIR OWN state and Fed tax returns.

Why would an agent’s broker risk violating RESPA and risk a tax audit for the actions of one of its agents?

Refunding/rebating a commission after COE; will not be considered a legit business tax deduction by the IRS or the Cal Franchise Tax Board. Consult a CPA for further info.

Other Closing Cost Credit Rules

Check with the buyer’s lender to ask about the maximum allowable credit as a percentage (%) of the purchase price.

1) Fannie Mae allows (up to) 3% of a home’s sales price for credits that can (realistically) be given to the buyer.

2) FHA and VA lending guidelines allow for (up to) 6% closing cost credits, but individual lenders only allow for to only 2-3% of the purchase price.

3) Investment properties are limited to a 2% credit of the sales price

4) One quick “side” note: In the case of investment properties, none of the funds needed to COE can be gifted from an outside source.

In Conclusion

Seller-Lender-Buyer credits are intricate. Each party must communicate clearly for a successful, timely COE that provides agents and their lenders a lifetime of repeat biz and referrals.