Seller Credits, Can I Negotiate For Them??

Question

Hey BP Members!I currently have a property under contract and just had the inspection done last week. There are a couple major issues, one being that we need a complete re-pipe of the units. I initially wanted to go in with the strategy to renegotiate by requesting a seller credit on the back end so that I can take care of the various repairs myself. I am financing with an FHA, so 3.5% down would be close to $20,000 after closing costs. I wanted to negotiate for about $30,000 seller credit, however my agent initially had never heard of this tactic, and then came back and is telling me that the lender (not my mortgage broker) would not allow this. Has anyone used this tactic before? Is there a possibility that the lender would prevent this type of negotiation?Thanks!

Key words: Thurston County, Olympia, Pierce County, Seattle, Tacoma, Rehab, Washington, contractor, GC, Grays Harbor County, Mason County, Lewis County

Kevin Romines · Answer

@Patrick Britton

Kevin Romines · Answer

@Patrick Britton Here are the Fannie Mae guidelines as to interested party contributions.

Occupancy

Seller Contribution/ IPC %

LTVMin

LTVMax

CLTVMin

CLTVMax

Investment

2%

-

Owner Occupied

3%

90.01%

97%

90.01%

97%

Owner Occupied

6%

75.01%

90%

75.01%

90%

Owner Occupied

6%

90.01%

95%

90.01%

95%

Owner Occupied

9%

-

75%

-

75%

Second Home

6%

75.01%

90%

75.01%

90%

Second Home

9%

-

75%

-

75%

Note: 90.01% - 95% LTV/CLTV seller contributions to 6% only applies to FNMA home path properties.

Ike Hobbs · Answer

Yes this is going to be a bigger issue with your lending, especially if you're using FHA financing. At this point if your lender now knows about the repairs it's also possible that the appraiser will demand that those repairs be done before closing. Your agent is correct that it's not the mortgage broker but rather the lending guidelines that are going to be an issues. You could look at getting a FHA 203k loan which would allow you to finance the repairs but there's some hoops you would have to jump through in getting bids, approved contractors etc that could make your seller not want to move forward.

I would recommend you have a serious conversation with your agent about whether this will become an issue in the appraisal and if so look at getting the seller to agree to fix it if the appraiser calls it out. If you can't come to terms now with the seller then you might want to kill the deal now before also paying for an appraisal. Also getting the seller to agree to major repairs in the contract means the appraiser will see it and they will almost always call it out then.

Patrick Britton · Answer

@Kevin R.  thank you so much for that!  very interesting.  but the columns didnt format great.  can you clarify when is it only 3%?

Jake DeAtley · Answer

Thank you everyone for the input! I apologize that I have not responded to everyone individually, but I really appreciate everyone's insight!

Kevin Romines · Answer

@Jake DeAtley you can get up to 6% credit toward your closing costs only, on an FHA purchase. You can not fund a repair or rehab account to be done after closing when using the standard FHA purchase loan program.

The alternative to that would be to do an FHA203K loan. This loan allows you to fund on the purchase and do the rehab after the closing. Its still 3.5% down payment of the purchase price and rehab or total costs. So its still a very inexpensive way to get into a 4 plex and get the quality of end product that you want.

However you will be required to have 3 bids from contractors that are capable of getting approved with FHA. You will also be required to have an approved FHA consultant (Depending on the size and scope of work of the rehab) to write up the scope of work and create their own estimate of costs. The contractors will be required to use that scope of work and insert their numbers. If their numbers are higher than the consultants estimate, the consultant will have to reconcile the estimates.

Bottom line, its 3 times the amount of work to close on that loan versus a standard FHA purchase transaction. So you must really decide if this is the correct course of action and if it is, be committed to it and realize that it will take much longer to close the whole deal.

The alternative to all that would be to take out a hard money loan for the purchase and rehab. You would be required to have 15-20% down plus closing costs, plus reserve requirements. The hard money lender would fund the rehab. Once you were done with all rehab, you could then refinance the loan to a Fannie Mae loan or and FHA, depending on your circumstances?

Patrick Britton · Answer

@Jake DeAtley FHA allows at most something like 6% of purchase price back to buyer in seller credits.  This isnt because of the particular lender, this is an FHA rule.  Conventional loans has a limit too, which might be 6% as well but i am unsure of that one.

Danny Randazzo · Answer

@Jake DeAtley I have negotiated several seller paid closing credits. Most lenders require the buyer to bring at least the down payment money to closing. For example, if you are buying a $100k house with 3.5% down you have to bring $3,500 at a minimum to closing (usually $3,500 plus fees). In this example, lets say you negotiate a $5,000 credit for your pipes. Your $3,500 payment turns into a check to you for $1,500. Lenders today don't like this type of closing where buyers don't have "skin in the game".

One option is to reduce the purchase price by your credit amount. Another option, you could ask the seller to fund a repair escrow account that an attorney oversees and when you make your repairs the attorney reimburses you. Sometimes you can get the seller to pay you the repair cost directly outside of closing but this is not typical.

Dave Skow · Answer

Jake-  most FHA lenders  will :

1)require any  credit  from seller/ agent to be applied to  closing costs / loan fees/ prepaid interest / taxes / insurance  or the UFMIP ( upfront mortgage insurance premium )

2) lenders will rely on the FHA appraisal  and  normally not require the property inspection ...so if appraisal  requires nothing to be done on the  repiping ...you should be able to do this post closing on your own timing ...if appraisal requires it to be done - then you will likely need to have this  done before closing

Mike Cumbie · Answer

Hi @Jake DeAtley,

Are you looking at adding 30K? to your current 20K request?

You can have money left over to the side for repairs but they have to be escrowed with an FHA. So the money is set off to the side and once a new inspection is taken they will release the funds. If you are looking at plumbing they may require a licensed plumber, permits and all sorts of goodies.

But yes after an inspection you can make credits, but if FHA demands the repairs then you have to fix it before closing or put it in escrow.

Hope it helps some.

Seller Credits, Can I Negotiate For Them??

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