Closing Cost Credit for Repairs Greater than Closing Costs

[Alex Roth]

Hi All, I am in contract to purchase a 2-family property. I am financing the purchase with a 3.5% down FHA mortgage. Through my due diligence I discovered repairs needed and have agreed upon a credit from Seller in the amount of $25,000. My expected closing costs are about $15,000. That leaves me with $10,000 that I need to receive as a credit. I am unwilling to accept a purchase price reduction in the amount of $10,000 because of how highly leveraged I am. A $10,000 price reduction will only save me $350, meaning I will still have to come out of pocket about $10,000 greater than underwritten, when it comes time to do the repairs. I do not want to purchase the property if I have to exceed my underwriting in this fashion. So the question is, how can I creatively structure the $10,000 Seller credit so that it directly offsets my costs to perform the repair work after closing? I have explored the concept with my lender of the $10,000 being disbursed to an escrow account at closing for post-closing repairs but they have indicated that this will lead to the Lender needing to do further diligence on the repairs, perform inspections, etc. all of which will kill the deal for me, because I need to close in the next week. Can I have a side agreement with the Seller that after closing they will distribute an extra $10,000 back to me? How else can this be achieved?

[Chris Mason]

Without breaking the rules/laws, there's not really a way to get the $10k in your pocket at closing. You didn't post the purchase price, but $25k may even be over the FHA seller credit cap anyways (don't worry, if your LO and/or real estate agent didn't catch it upfront then I'm sure the underwriter will... at the last second :P ).

Various things you can do to put the $10k to work.

- Get the most expensive insurance policy your carrier offers, since you will be paying the first 12 months upfront. Ask your insurance agent what happens if you downgrade the policy after closing -- you might like the answer, even if the insurance agent isn't going to like it.

- Pay the FHA UFMIP upfront. This is money you will get back when you go to sell, since now you are less in debt.

- Most common is to buy the rate down. Discount points. No $10k in your pocket today, but the savings will add up to >$10k over the life of the loan. 

- Ask your lender if they are 100% certain they are collecting ALL the property taxes they can for the impound account. Impound accounts are audited annually, and if it's over-funded you get a refund check.