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This is a brief summary of real estate contracts. This summary does not cover all aspects of the contract. This video has been made specifically for Real Estate Agents to use as an unofficial educational resource. Nothing in this video is intended to convey legal advice or best practices in any field. This video is only intended to give general advice on broad topics relating to contracts and the closing process at large. For legal advice please contact an attorney and for lending advice please contact a lender.
8. SETTLEMENT CHARGES – SELLER
In Huntsville, we’re currently in a seller’s market, but if you’re in a buyer’s market you can ask the seller to contribute toward closing costs. This often comes up if the buyer would love to buy the house, but doesn’t have the $5,000 readily available to pay closing costs. You’ll see after “towards Purchaser’s Total Settlement Charges” in green it says “half of title insurance” and “costs Purchaser is not allowed to pay” under the FHA/VA rules. This is the first time you see it mentioned that we are splitting title insurance. Many sellers come to the table and are surprised by this, but it’s mentioned multiple times in this contract. You can save yourself from having this awkward discussion with your seller at the closing table by ensuring that you explain this to them beforehand: they’re paying half of the owner’s title and the lender’s title.
Back to “Seller contribution toward closing.” A lot of times people will actually loop this into the total purchase price. Let’s say your seller needs to make $200,000 on the deal, but your buyer can’t afford to pay any closing costs. In this case you would ask the seller to contribute $3,000-$5,000 toward closing costs and bump the sales price up accordingly since, even though your buyer doesn’t have the cash to pay these fees at closing, they can finance the extra cost. This makes it a net for the seller to where they don’t actually end up paying anything extra or losing money, but they allow the sale to happen by shifting it around a bit. If you up that purchase price to include the seller contribution and the property doesn’t appraise, though, then we have other issues.
Sellers can only contribute 3-9% of the purchase price in closing costs at maximum, though it very rarely exceeds $5,000. This comes down to the type of loan and the down payment. There’s a limit to how much this game can work for you, but understanding all these terms and how they work can help you with your negotiation process.
It’s also important to note that any contribution the seller has agreed to pay is in addition to their closing costs. So if the seller agrees to pay $5,000 toward closing, this does not include your Realtor commission or their half of title insurance.
VA loans specifically do not let you pay for recording fees — fees for the deed and the mortgage. Again, VA loans are much different animals and are much harder to deal with — the government is involved and there’s a lot of red tape. This can create a problem in the market: sellers can choose to reject a contract based on the possibility of it requiring a VA loan, which can really hurt our veteran market. The recording fee is one more thing the seller would have to pay for that they wouldn’t have to pay for with a conventional or FHA loan.
In addition, the appraisal process for a VA loan is much more strenuous. They really try to protect their veterans and they’ll go in with a fine-tooth comb and ask for fixes in order to approve the loan. FHA also has a stringent appraisal process, but not as bad as VA, in my opinion. With a conventional, even if it doesn’t appraise you can sometimes borrow money and still go through with the loan.
Need more help with your contract? Call us at 256-427-2760.
