Lenders can limit the amount a seller can give a buyer as a closing-cost credit

August 11, 2012

Last Friday, we closed on a condo. It is a second home for us and was considered an investment property, although the truth is we bought the condo for our son.

At the closing table, we were informed that the 3 percent closing-cost credit agreed to in the contract by the seller had to be reduced to 2 percent, leaving us to come up with $680 more on the spot.

Is it a fact that with a traditional loan with 20 percent down, the seller is not able to give a buyer a 3 percent closing-cost credit for the purchase of a home?

Lenders do, in fact, have restrictions on the amount a seller can give to the buyer as a closing-cost credit. Depending on the loan program you are in, those restrictions can reduce a closing-cost credit that the seller may have offered you on the purchase and sale agreement.

Frequently, contracts for the purchase and sale of a home will provide that a seller will give the buyer a closing-cost credit — that is, money to pay for closing expenses — of a certain amount. However, the contract will also state that the closing agent may reduce the credit depending on the amount the lender is willing to allow.

A lender will generally allow a credit for up to 4, 5 and even 6 percent of the purchase price for a home, but it must be applied toward legitimate closing costs. Once you run out of closing costs, the lender will not allow further credits to be applied.

In your situation, if your 3 percent credit was equal to about $2,000 but you had only about $1,300 in closing costs, the lender would allow you to apply only $1,300 of the $2,000 toward those costs. You would still have other expenses on the day of the closing, but those charges might not be considered closing costs. And you would lose the balance of the funds.

You can usually expect that title company fees, recording charges, transfer taxes and certain lender fees will be allowable closing expenses. However, real estate taxes and prepaid interest expenses are not considered allowable closing costs for purposes of a closing-cost credit.

At issue here is whether the closing-cost credit adjusts the purchase price in the eyes of the lender. If it does, that can cause problems. Here’s why: If your loan is 80 percent of the purchase price and the purchase price is adjusted down by any amount, the loan would have to go back into underwriting as having a loan-to-value of more than 80 percent. You might also need to obtain mortgage insurance as well.

You raise a good question that is missed by many home buyers — particularly first-timers — who ask for and expect to receive a closing-cost credit from a seller. If you’re buying a property and plan to ask for a closing-cost credit, you should make sure you know what expenses you will incur in the closing and which of them can be used against a closing-cost credit.

In some cases, points paid to a lender to reduce the interest rate on the loan will increase your fees at closing, but those points can usually be counted against a seller-given credit.

Ilyce R. Glink’s latest book is “Buy, Close, Move In!” Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call Ilyce’s radio show toll-free (800-972-8255) any Sunday from 11 a.m. to 1 p.m. Contact Ilyce and Sam through her Web site, www.thinkglink.com.

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