How To Get Home

How much cash are you going to need at closing? What account are you going to pull these funds from? After you have met with your Mortgage Planner and you are trying to decide how to structure your offer to the seller, consider the option of having the seller contribute towards closing/prepaids.

If the industry is in fact moving toward more buyers being forced to make down payments, some of those soon-to-be home owners might want to consider maxing out the seller’s contribution limits. Different loan programs will allow the seller to contribute towards closing costs. In order for the seller to do this, you have to offer them a price that works for them.

For example, let’s say you were able to negotiate the seller down to a sales price of $200,000 and at that price, the seller is not paying anything. We will assume the buyer is putting 5% ($10,000) down and will finance the remaining 95% ($190,000). For our example we will assume the closing costs are $5,000. To set up the escrow account, another $2,000 will be required at closing. Let’s also assume our buyer has saved up $18,000 for the entire home buying process and has no other real savings.

At present, Fannie Mae will allow the seller to contribute up to 3% of the sales price if the buyer is making a down payment of 5% or less. So we could ask the seller to pay $6,000 in the above example, which would leave ($5,000+$2,000 less $6,000) $1,000 left for our borrower to pay. With the $10,000 down payment and the $1,000 left in closing, our buyer would be looking at $11,000 to close.

Based on the above example, our buyer has $7,000 left in the bank for moving costs, utility hookups, and some basic home improvements. As opposed to not having the seller pay anything and the buyer would only have $1,000 left of the original $18,000 after paying the $17,000 in down payment, closing, and escrow.

So what is the difference? Assuming you would have to give the seller $6,000 more to have them contribute the same amount towards closing, you are raising the monthly payment by $34. This breaks down to $5.67 for each $1,000 that the seller pays. So what makes you sleep better at night, a $34 a month lower payment or $6,000 left in the bank? Lots of new home owners will struggle in the first few months will all the little things that come up after closing. Keeping a little of your cash in the bank by spending some of the seller’s money might help you be ready for the unknown and sleep a little easier.

Talk to your Mortgage Planner and find out what the seller’s contribution limits are for the loan program that you are looking at to see what your options are.

There is nothing better than a good night’s sleep.