As we all know, Real Estate Lenders are carefully reviewing all aspects of a loan, including the proposed HUD. As a result, problems may occur when the Seller has agreed to pay part of the Purchaser’s closing costs as a “closing cost credit.” The usual “issue” concerns what is allowed as a closing cost credit.
The problem may start with the language used in the contract. For example, the contract states “The Seller agrees to pay $6,000 of the Purchaser’s closings costs.” What happens if prepaids (i.e. escrows, hazard insurance premium or prepaid interest) need to be included as part of the $6,000 in closing costs?
One possible solution would be to verify with the Purchaser’s intended lender as to what closing costs will be allowed to be paid by the Seller. Then be specific in the contract as to what closing costs are intended to be included. For example, “The Seller agrees to pay $6,000 of the Purchaser’s closing costs including, but not limited to origination fees, discount points and prepaids.”
Another problem may occur with an REO Seller as to what they will allow as a Seller paid “closing cost credit.” Even though the Purchaser’s lender will agree to the closing cost credit, the REO Seller will insist that a certain cost is not allowed or cannot exceed a certain amount. Again, the best policy is to attempt to verify ahead of time what will be allowed as a “closing cost credit.”
Next week’s “Tucker’s Tip” will discuss additional problems with this issue.