How to lower your closing costs with sellers assistance in PA

Emoticon with help wanted signThe mortgage rules allow, but do not require, the seller to contribute a percentage (or a fixed cash amount) to your closing, escrow, and prepayment expenses. The amount of seller assistance (closed-costs paid by the seller) is determined by the kind of mortgage, down payment, and sales contract.

The seller may contribute up to 6% of the sales price toward the buyer's FHA financing expenses. A veteran mortgage (VA) allows the seller to pay all closing expenses, as well as prepayment and escrow costs up to 4% of the sales price.
It also relies on the down payment for a traditional mortgage. The seller may pay 3% of the sales price for a down payment of 5% to 9%. The limit is 10% to 25% down, with a maximum of 6%. And now for a little-known truth. If the down payment is 25% or higher, the seller assistance may be up to 9%.

Be careful . . . the seller is limited to the seller assist percentage or the actual costs.  Here's what I mean. Let's say the sales price is $100,000 and you're financing the purchase with a FHA mortgage and you ask the seller and the seller agrees to pay 6% of the sales price toward your costs.

But, if all the allowable costs add up to only $5,000, then the seller will only be permitted to pay $5,000 and under this scenario, will keep the extra $1,000.

Is it better to have a lower sales price and no seller assistance or a higher sales price with a seller assist?

Let's compare:

Assume the home is listed at $106,000, but, you have the choice of purchasing the house with NO SELLER ASSIST at $100,000 or paying FULL PRICE at $106,000 and the seller will pay 6% toward your closing and escrow and prepaid costs. FHA mortgage, 30-year term.

ASSUMPTION No Assist Seller Assist
SALES PRICE $100,000.00 $106,000.00
Annual Real Estate Taxes $3,200.00 $3,200.00
Annual Homeowners Insurance $400.00 $424.00
 
Down Payment Percentage Minimum Minimum
Mortgage Amount $97,465.00 $103,313.00
interest-rate 5.00% 5.00%
Term 30-years 30-years
 
DETAILS OF THE TRANSACTION    
Down Payment Amount $3,500.00 $3,710.00
closing-costs $3,076.75 $3,166.75
Escrow and Prepaids $5,176.96 $5,295.58
Subtotal $11,753.71 $12,172.33
Less Appraisal $- $-
Less Credit Report $- $-
Less Earnest Money Deposit $- $-
Less Seller Assist $- $6,360.00
Less FHA Financed Funding Fee $965.00 $1,022.90
TOTAL CASH TO PURCHASE $10,788.71 $4,789.43
 
MONTHLY MORTGAGE PAYMENT No Assist Seller Assist
Principal and Interest $523.21 $554.61
Homeowners Insurance $266.67 $266.67
Real Estate Taxes $33.33 $35.33
MIP/PMI $72.38 $76.72
MONTHLY PAYMENT $895.59 $933.32

Notice that the cash requirement at closing is considerably less with a seller assist, but now for the bad news. Take a look at the mortgage payment . . .

As you can see, the mortgage payment is HIGHER with the seller assist than no seller assist. Why? Because with the higher sales price comes with a higher mortgage amount, which in turn increases the principal and interest payment.

Final comment
The real estate agent and or the lender may suggest that the seller to increase the listed price to include the seller assist. In other words, raise the sales price beyond the listed price and build in the seller assist. This was a common practice prior to the mortgage melt down, and it's still done today, but, with tighter regulations, underwriters frown on this tactic. They can see through it and the appraiser may point this out to the underwriter in their appraisal report. Here's the potential consequence. The underwriter may only allow the "original" listed price and not the inflated price. So what happens, well, either the seller agrees to accept less or the deal falls apart. Here's your downside. You will probably have a home inspection prior to underwriting review, that's about $400, and you'll have an appraisal and credit report fee paid to the lender, figure about $400. So, if the mortgage falls apart because of the seller assist inflation, you will lose those out of pocket fees.

Offering a full-price offer (not inflated) will usually be permitted, assuming the house appraises at the full, listed price.

  Answers to Frequently Asked Questions About Seller Assistance (seller assist)

Q. Can the seller assist be used for the down payment?
A. No. The seller assistance is limited to closing-costs and prepaid expenses (i.e. tax escrow, prepaid homeowner's insurance, and per diem interest, etc.). The FHA and Conventional97, and HomeReady loans permit the down payment to be "gifted".

Q. Can the seller assist exceed closing-costs?
A. The mortgage rules clearly state that the seller assistance can not exceed the allowable closing and prepaid costs. In short, no cash back.

Q. How do I get my money back after closing for repairs?
A. If the home requires repairs, use a seller assist to reduce the total cash requirement and use the savings toward repairs. If the home requires more money to make repairs or upgrades, I suggest you look at the 203(k) loan.

Q. How does the seller assist affect the seller?
A. The seller assist may be necessary to help the buyer purchase the home. In many situations, home sellers will concede a seller assistance in lieu of a reduced sales price.

Q. How does the seller assist work?
A. The amount/cost of the seller assist is defined by the sales contract. The amount of the seller paid closing-cost cannot be outside of settlement.

Q. Is a seller assist a good idea?
A. Every home-buyer is different. If you're scratching up cash to buy a house, then yes, a seller assist is a good way to reduce the amount of cash at closing. Seller assist can be used to purchase discount points to lower the interest-rate.

Q. Is a seller assist tax deductible?
A. The seller assist is not tax deductible. The cost is an ordinary expense on the sale.

Q. What happens if the closing-costs are less than the seller agreed to pay?
A. As stated earlier, the maximum seller assistance is limited to the amount stated in the sales contract. If the closing-costs are less than anticipated, the seller gets to keep the difference.