It is not uncommon for real estate agents, mortgage loan officers, buyers and sellers to inquire as to how much the seller is allowed to pay in contributions on a
Any closing costs that are normally paid by the borrower are considered contributions if they are not paid by the borrower. The seller, builder, developer, real estate agent or any other interested party to the transaction, including any affiliates, may pay these contributions.
The maximum allowable contributions from interested parties are based upon the lesser of the purchase price or appraised value, property type and the down payment amount.
Primary residences and second homes with less than 10% down allow contributions of 3%. If the buyer pays between 10 and 25% down the contributions are limited to 6%. Down payments of more than 25% allows contributions up to 9% on conforming loan amounts but non-conforming loans are limited to 6%. The maximum contribution is 6% for conforming 80/20 and 90/10 on primary residence and second home financing.
The contribution on investment properties is limited to 2% regardless of amount paid down.
Contributions toward any of the following are included in the maximum allowable limits:
Mortgage insurance premium
Discount Points for temporarily or permanently lower the borrowers monthly payment or interest rate.
Any other transfer charges normally paid by the borrower, e.g., transfer taxes, tax stamps, title insurance, surveys, appraisal, and recording and attorney fees.
Homeowner association fees for future dues.
If there are excess contributions, a downward adjustment to the property's sales price must be made to reflect the amount of any contributions that exceed the maximum contribution limits. The LTV/TLTV ratio must then be calculated based upon the lesser of the reduced sales price or the appraised value.
The cost of any personal property, e.g., furniture, decorator items, automobiles or other "giveaways", must always be deducted from the property's sales price regardless of the amount of any other contributions.
A cash credit, cash rebate, incentive or inducement/enticement to purchase from the seller, builder, or developer must also always be deducted from the property's sales price. Examples may include but are not limited to: excessive marketing costs, commissions, or seller financing at below market interest rates.
A new LTV/TLTV must be calculated whenever the property's sales price is reduced. The LTV/TLTV is based on the lesser of the adjusted sales price or the appraised value. Personal Property Exception
Typically, a short list of personal property may come with a house. Most built-in appliances (such as stove, refrigerator, dishwasher), window coverings and carpeting, are usually considered to be fixtures so no adjustment to the purchase price is needed.
Sometimes personal property may be left for convenience and has minimal value (e.g., pool cleaning equipment, lawn mowers, picnic tables and patio sets). Generally, if personal property equals less than 2% of the value of the property or has a value of less than $500 it is not considered a contribution.
You can see how important it is that Loan Officers and Real Estate Agents understand the limits of concessions. Sales contracts and mortgage loans should be structured accordingly. A lack of training on our part can cause major frustration for the buyer and seller.