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Unless a person is paying cash for a home, the type
of financing your buyer chooses will affect the amount you have to pay
in closing costs, impede your ability to negotiate a good contract on
the home, and require you to complete repairs on the property that you
may deem unnecessary.
For most home buyers who plan on living in the home, there are three
types of loans that they will use to purchase real estate:
1) conventional home loan financing
2) FHA insured home loan financing
3) VA guaranteed home loan financing
Each of these types of loans may impose any one or more of the following
restrictions and requirements on the buyer and seller by limiting how
much a buyer can borrow due to maximum mortgage limits for the area,
limit how much a seller can contribute towards the buyer's closing costs
and down payment, require the seller to pay for costs that the lender
prohibits the buyer from paying, and/or require the seller to complete
certain repairs before the sale can close.
Conventional mortgage financing is one of the most common means a buyer
uses to purchase a home. This type of loan is neither insured or
guaranteed by the government. To qualify for a conventional loan, a
buyer is required to have a down payment of at least three to five
percent of the sales price, have good credit, qualify for a payment that
does not exceed standard payment to income ratios, and in cases where
the down payment is less than twenty percent (in most cases), qualify
for private mortgage insurance.
As a seller, there are several restrictions and limitations that you
should be aware of:
1) conventional loans have a maximum loan amount. If the sales price exceeds this amount, the buyer is required
to pay a larger down payment or try and qualify for another type of
financing that allows for a larger loan amount.
2) the seller may only contribute a maximum of three percent of the
sales price towards the buyer's closing costs when the buyer is
qualifying for a five percent or less down payment (this amount
increases to a maximum of six percent when the down payment is greater
than or equal to ten percent). Though this may not seem like a
significant issue for the seller, having the ability to negotiate terms
over price may make the difference between selling a home and having to
make another mortgage payment on a home while it sits there with a for
sale sign in the front yard.
3) under most conventional loan programs, the seller may not contribute
to a down payment assistance program in order to help a buyer to qualify
to purchase the home. In order for the seller to pay the buyer's down
payment, the buyer will have to find a different type of mortgage that
will permit these types of contributions.
4) the lender will require an appraisal on the property. If the
appraisal comes in below the sales price, the seller may have to lower
the sales price, the buyer may have to come in with additional money, or
the buyer and seller may elect to cancel the contract and both parties
will have to start the process all over again.
On the bright side, conventional loans do not require the seller to pay
for certain buyer closing costs like other mortgage programs. The seller
does not have to pay any of the buyer's closing costs if he or she does
not want to do so. FHA home loans differ from
conventional financing because the government insures this loan against
foreclosure, thus protecting the lender in case of buyer default. For
the consumer, FHA home loans offer a competitive means to finance a home
with only a three percent down payment, low mortgage insurance rates,
relaxed qualifying guidelines, and the ability to have the down payment
gifted by a family member or non-profit organization.
As a seller, there are several restrictions and limitations that you
should be aware of:
1) FHA loans have a maximum loan amount. (To determine the maximum FHA
loan amount in your area, visit the FHA Library at
http://www.fhalibrary.com/). With a minimum down payment of
three percent, divide the maximum loan amount to determine the maximum
sales price for your area. If the sales price exceeds this amount, the
buyer is required to pay a larger down payment or try and qualify for
another type of financing that allows for a larger loan amount.
2) the seller may only contribute a maximum of six percent of the sales
price towards the buyer's closing costs. Though this may not seem like a
significant issue for the seller, having the ability to negotiate terms
over price may make the difference between selling a home and having to
make another mortgage payment on a home while it sits there with a for
sale sign in the front yard.
3) the seller may contribute to a down payment assistance program in
order to help a buyer to qualify to purchase the home. However, the
seller is limited to the aforementioned six percent contribution for the
buyer's down payment and closing costs.
4) the lender will require an appraisal on the property. If the
appraisal comes in below the sales price, the seller may have to lower
the sales price, the buyer may have to come in with additional money, or
the buyer and seller may elect to cancel the contract and both parties
will have to start the process all over again. Furthermore, FHA requires
the home to meet minimum living conditions which could cost the seller
money. Examples of these requirements include additional certifications
for flat roofs, repainting areas on the exterior of the property where
paint is flaking and peeling, and insuring proper drainage and grading
of the yard.
5) FHA will not allow the buyer to pay for certain traditional closing
costs. As a result, the seller is usually required to pay these
"non-allowable" costs which range in price from $500 to $1,000,
depending upon the lender. Refusing to pay these costs may result in the
buyer having to cancel the contract.
If your buyer is a qualifying veteran and chooses to use his or her VA
benefits by qualifying for a VA home loan, the impact could be greater
than FHA financing. A VA home loan is offered to qualifying veterans
that are serving or has served in the military, including the reserves
and National Guard. Guidelines allow for 100% financing, no mortgage
insurance, relaxed credit guidelines, and the ability to allow the
seller to pay for all of the closing costs.
However as a seller, there are several items that you should be aware
of:
1) VA loans have a maximum loan amount of $240,000. A qualifying veteran
can purchase a home up to $240,000 with no money down (100% financing).
Should he or she elect to purchase an more expensive home, he or she
will be required to put additional money down, have the seller lower the
sales price, or qualify for different financing that allows for a
greater loan amount.
2) the seller may only contribute up to four percent of the sales price
towards the buyer's closing costs. Though this may not seem like a lot
of money, it should be sufficient to cover the buyer's closing costs and
allow him or her to purchase the home with little to no money out of
pocket. This is particularly effective when the seller is able to forgo
the usual haggling over price and offer the home at the asking price
with no money down.
3) the lender will require an appraisal on the property. If the
appraisal comes in below the sales price, the seller may have to lower
the sales price, the buyer may have to come in with additional money, or
the buyer and seller may elect to cancel the contract and both parties
will have to start the process all over again.
4) VA will not allow the buyer to pay for certain closing costs. Similar
to FHA, the seller is usually required to pay the non-allowable costs.
With so many types of financing available to buyers
these days and the ever changing guidelines and procedures for home
loans, sellers are facing mounting pressure to give up their equity in
order to pay additional costs that they may not have had to pay when
they first purchased the home. When deciding whether or not to accept a buyer's
purchase offer, ask yourself the following questions:
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How qualified is the buyer ?
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Are there any costs that the buyer's lender will
require me to pay?
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Where is the buyer's down payment coming from?
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Am I paying any of the buyer's closing costs?
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Is the lender requiring me to complete certain
repairs?
How qualified is the buyer? Most
buyers in today's marketplace have taken the initial steps to determine
if and how much of a mortgage they will qualify for. When deciding
to take your home off of the market and committing yourself and your
home to one person, be sure that they are qualified to buy the house.
Serious buyers will come in three varieties: 1) unqualified, 2)
pre-qualified, and 3) pre-approved.
An unqualified buyer is a buyer that has decided to
purchase a home without first exploring the possibility of determining
his or her purchasing ability. This buyer may qualify for a home
loan that would allow them to buy your home or they may not. As a
seller, do not accept an offer from a buyer who has not talked with a
lender and received some type of indication about his or her qualifying
ability. If you decide to accept an offer from an unqualified
buyer, include provisions in the contract that indicate how long a buyer
has to qualify for a mortgage and whether or not the earnest money is
refundable to the buyer if he or she does not qualify.
A pre-qualified buyer is someone who has taken the
steps to talk with a lender, a bank, a mortgage broker, or a financial
institution to determine his or her qualifying ability. Though
this is not the formal process outlined below, the lender will run
calculations to determine how much of a loan and what type of loan the
buyer is eligible for. In some cases, the lender will run a credit
check to make sure that there are not any unforeseen hurdles that could
pose a problem. A pre-qualified buyer should be able to produce a
letter from the lender indicating his or her qualifying ability and
under what specific conditions. As noted before, it is still
advisable to write provisions in your sales contract to indicate how
long a buyer has to fully qualify for a mortgage and whether or not the
earnest money is refundable if he or she does not qualify.
A pre-approved buyer is a seller's ideal buyer
because this person has taken the steps to make a formal application
with a lender, submitted applicable paperwork to the mortgage company,
allowed the lender to analyze his or her credit, and knows that he or
she qualifies to purchase your home. A pre-approved buyer is
second only to a cash buyer. The buyer should have a pre-approval
letter that indicates the firm commitment of the lender. Be sure
to still include provisions for the earnest money in the sales contract.
Are there any costs that the buyer's lender will
require me to pay? Many sellers are unaware that several loan
programs that a buyer may elect to use to purchase a home will not allow
the buyer to pay for certain fees. As a result, it is standard
practice for the seller to pick up these fees. FHA and VA loans,
as stated above, do not allow the buyer to pay for "junk" fees. "garbage"
fees or "non-allowable" fees. In Phoenix, for example, lenders will charge from $500
to $1000 in non-allowable fees to the seller for FHA and VA loans.
Before accepting a contract, ask the buyer's lender how much these
fees will set you back. If you feel that these fees are too high,
you do have the right to refuse to pay them. You could, however,
lose your buyer by refusing to pay these fees.
Where is the buyer's down payment coming from?
Though most buyers will have sufficient funds for the down payment on
the home, you may find a buyer who wants you to contribute money towards
his or her down payment through a non-profit organization such as
Neighborhood Gold, Nehemiah, or other grant programs. Many will
scoff at the idea of having to give money to the buyer for the down
payment (especially if you did not have the seller give you your down
payment...), you may decide to do so if it translate into a sale.
Before agreeing to contribute money, have a clear idea of how much the
buyer wants you to contribute and if there are any associated processing
or administrative fees that you are requested to pay.
Am I paying any of the buyer's closing costs?
In previous sections, we explored the possibility of attracting more
buyers by offering to make it easy to purchase your home. One
tactic was decreasing the amount of money a buyer needs to purchase your
home by offering to pay all or part of his or her closing costs.
Before agreeing to contribute towards the buyer's closing costs, be sure
to check with the buyer's lender to make sure that there are no
restrictions for such contributions. Certain loan programs
prohibit or limit the amount a seller can contribute to a buyer.
In addition, you should include provisions in the sales contract that
state that any money you offer for the buyer's closing costs that is not
used by the buyer shall revert back to you.
Is the lender requiring me to complete certain
repairs? Though a buyer may not request certain repairs to be
completed before the close of escrow, the buyer's lender may require you
to complete a list of items before they will fund the loan that will
allow the buyer to close the deal. This could include the
replacement or installation of carpeting/flooring inside the house,
having to paint the outside exterior of the home, or fixing an
electrical issue with the home. For information on items sellers
should address before selling their home,
click here.
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