QUESTION: I am about to sell my house, and the real estate agent has suggested that a potential purchaser may have to go the VA or FHA route. The agent further suggested that I may have to pay a lot of points at settlement. There is very little equity in my house, and I need every penny that I can get from the sale. Is there any way that I can protect myself against a high number of points?

ANSWER: Yes and no.

The queston of "points" paid at settlement by both buyer and seller is perhaps one of the most difficult--and frustrating--aspects of a real estate transaction.

In the good old days, when rates were not fluctuating wildly, lenders either did not charge points, or if they charged them you had a fairly good idea--well in advance of closing--exactly how many points would be charged and to whom.

Unfortunately, in today's economy, lenders generally are unable to give you an exact point structure until the actual closing.

A point is a dollar amount that you pay to a lender in order to "encourage" the lender to give you the loan. Each point is one percent of the amount lent. Thus, if you are borrowing $75,000, one point is $750, and this is cash that has to be collected at settlement.

Generally speaking, a buyer who obtains a conventional loan will pay all of the points. If you call a commercial real estate lender, you will find that the point spread varies, depending on the type of loan you obtain.

For example, a fixed-rate, conventional, 30-year mortgage may carry a maximum of two to three points today. If the borrower is obtaining a $75,000 loan, three points would be $2,250.

This is a lot of money to pay under any circumstances, but it hurts the most because it has to be paid in cash at settlement. Often, a buyer and seller will negotiate the payment of these points, and there are no legal rules or requirements regarding the payment of points on conventional loans. I have seen cases where the seller is anxious to conclude the deal and agrees to pay all of the points. I have seen other cases where the seller puts a one-point restriction in the contract, and in many instances sellers take the position that they absolutely refuse to pay any points at all.

As this column has discussed on numerous occasions, all of these factors should be considered in the negotiations between buyer and seller.

However, when it comes to transactions involving VA or FHA loans, the buyer is prohibited from paying more than one point. Thus, for example, if lenders are requiring four points for these loans--and they have been requiring even more lately--the seller will be obligated to pay the three additional points--with the buyer paying one.

The standard-form real estate contract usually contains language that reads as follows:

If a new loan is to be placed, the purchaser agrees to pay a loan origination fee of one percent (1%) of the principal sum of the loan on FHA and VA loans and percent ( %) of the principal sum on any other loan. The seller agrees to pay a loan placement fee of percent ( %) of the principal sum of said loan. . . . The above loan origination and placement fees are based upon current FHA or VA regulations and/or the present mortgage money market. It is further agreed that the parties will comply with any reasonable change in said fees at the time of settlement, provided said change is permitted by FHA or VA regulations (if FHA or VA loan) and/or is due to a change in the mortgage money market. . . . "

This paragraph is (or should be) contained in every real estate sales contract. Both the buyer and the seller should read this carefully, and make sure they fully understand the implications of that paragraph. I have seen too many settlements fall apart when sellers learned, for the very first time on settlement day, that they were obligated to pay six, seven or even more points at settlement because of our crazy economic conditions over the last few years.

You asked whether there is any way to limit the amount of the points. I gave you an answer that clearly is ambiguous--namely "yes and no."

Yes, you can limit the number of points that you, the seller, will pay at settlement. You should cross off the language in the paragraph quoted above that indicates you will "comply with any reasonable change in said fees at the time of settlement. . . . " You also can add an addendum to the contract that states:

Notwithstanding any other provisions of this contract, the seller agrees to pay no more than points at settlement.

You can protect yourself further by calling up the buyer's lender--right after the buyer has made application for a mortgage loan--and asking if the lender is willing to sign an agreement (often called a Bilateral Agreement Concerning Loan Discount) whereby the lender will guarantee that you are "locked in" on the number of points until settlement.

However, this is not the end of the story.

Points are charged by lenders primarily to raise their yield if the rate of interest they are charging on a mortgage loan does not permit them to compete in the secondary mortgage market. For example, a lender who needs to borrow money at an interest rate of 13 percent clearly is not going to lend you money at 12 percent without charging you additional points. A general rule of thumb is that each point raises the interest rate an eighth of a percentage point. Thus, in our example, a lender who needs 13 percent, but can lend the money out only at 12 percent because of VA or FHA regulations, will need to charge eight points in order to bring the yield up to what is needed.

Thus, while you certainly can lock in the points with the lender, if money market conditions require a higher rate of interest to be made on mortgage loans, or if the VA or FHA raise or lower the current interest rate ceiling, your bilateral agreement with the lender will become null and void. Clearly, no lender will lock you in to a point structure if he or she is going to lose money.

If you also have added the language in your contract stating that under no circumstances will you pay more than a specific number of points, the net result of a change in money market conditions may mean that, while you do not have to pay any more points, your buyer will not get a loan and your sale will not go through.

Thus, the answer to your question is, once again, "yes and no." While you certainly can protect yourself against an increase in points to be paid as the seller, you may find that this so-called protection ends up creating a loss of your sale.

In the final analysis, only you can decide whether you want to lock yourself in to a fixed point structure. If you are in no hurry to sell the house, then perhaps you may want to decide to hold firm on the points that you will pay. On the other hand, if you must sell (or want to sell quickly), then it is not advisable to lock yourself in unnecessarily to an arbitrary point structure.

Bear in mind that you often sign a contract 60 to 90 days before the actual settlement takes place. Under these circumstances, and with a rapidly changing mortgage market, you run the risk that the points may go above what you have contracted to pay, thereby losing the deal.

Whatever you do, work this out in your own mind before you sign the contract. Otherwise, it will probably be too late.