Cannot have seller prepay contractors for future work anymore (on Conventional loan)

[Mitch Davidson]

Until recently, the seller could pay a deposit to a contractor for work to be performed after closing, by way of the closing proceeds, and most of us wouldn't have to ask any questions when we saw a line item for the payment on the seller side of the CD. This approach was effectively a way for the seller to give the buyer more concession than the limit, meaning more than 2% of purchase price for a conventional investment purchase for example. As of late, FHFA (makes the rules for most mortgages) is now requiring written confirmation from the contractor that the invoice being paid relates to work that has ALREADY BEEN COMPLETED. Because the lender tends to not see seller side payments for things like this until a day or two before closing, this change can ruin a deal that's otherwise ready to close. So beware. 

Some solutions: 

1. Have the seller pay the deposits to the contractors before closing, rather than at and through the closing. 

2. Delay the closing and get the work done really quickly.

3. Change approaches and have the seller give more concession if you're currently under the "interested party concession" limit. Here's a link to the limits.

4. Lower the purchase price.

Some non-solutions:

1. If the property will be "investment" in occupancy, rather than primary residence or second home, the seller cannot give the buyer a temporary buydown.

2. The closing agent or attorney will tell you they cannot put the contractor deposits in escrow without showing them on the CD. 

Hope this helps you avoid a last-second transaction failure.