Seller Assistance - Simplified4/16/2014
Seller assistance can be a very useful tool for both buyers and sellers. Many may find this confusing, however we will attempt to simplify the process here. In the buying process, assuming the buyer is not an all cash buyer, the buyer would will need A) a down payment, B) a mortgage and C) cash for closing costs.
Seller assistance focuses on C - “CLOSING COSTS" only. Closing costs typically include mortgage fees, title search, attorney fees, recording fees, prepaid real estate tax and prepaid home insurance. For demonstration purposes, let's assume that total closing costs are $6000 for the buyer. In addition to the buyer’s down payment, which can be 0% for a VA loan (veterans only), 3.5% FHA Buyer, 5% or more conventional, the buyer also needs come up with cash of $6000.
When Submitting the offer, the buyer requests the seller to pay the $6000 closing costs.
…………… Hold on, sellers, don’t get too excited! For example, buyer and seller agree to a sale price of $200,000. The buyer will get a mortgage for $190,000 and have a down payment of $10,000. In the case of asking for seller assistance, we would increase the sale price to $206,000. The buyer still has a $10,000 down payment, however the mortgage amount will be $196,000. Simply stated - the buyer is financing the closing costs. With a 4.5% 30 year mortgage, the monthly payment increases by $30 or $360 per year. At this rate, it would take 16.6 years to add up to $6000. Many buyers would look at this and prefer to have $6000 as reserve and just pay $30 extra per month. FOR THE SELLERS Providing seller assistance is a great way to help sell your property. By helping with closing costs, sellers can attract first time buyers with minimal cash to put down. This is a win-win for both parties. A seller should look at seller assistance as a positive move. Think of the scenario without the seller assistance as basically the price that the buyer is offering. In the above example, the buyer is offering $200,000. The price is increased for the benefit of making the deal. Notes - A word of caution: the increase in sale price must be kept in line with market values. The mortgage company will have the property appraised and the property must appraise for the total sale price.
The taxes, insurance and interest are actually pre-paids, also and for conventional loans with 5% down the max seller contribution is 3% of the sales price.