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Seller Contribution
By Ed Hlavac, CTX Mortgage
A "seller contribution" is one of the best-kept secrets in the home-buying process. That’s when the seller of a home puts up some of the money needed toward the buyer’s closing costs. It can mean the difference between a sale of a home and no sale. Seller contributions can be negotiated at the time of a home purchase by having the seller pay closing costs rather than or in addition to a reduction of the home sales price. A seller contribution can seal a home purchase in some cases where the buyer does not have enough cash for both the down payment and closing costs. Many people can qualify for the payment on a home mortgage but encounter challenges in gathering the necessary cash. Often people worthy of a mortgage don’t have a lot of ready cash sitting around at the moment they find their dream house. Don’t let the idea of a seller contribution scare you. An experienced mortgage broker or banker can help you figure out the best way to put a deal together. He or she should also be able to help you understand the details well enough to be comfortable with the purchase structure. There are many other benefits of utilizing a seller contribution. Using the money from a seller contribution for the closing costs can free up more cash for a larger down payment. This can reduce or eliminate the need for private mortgage insurance (PMI) and can thereby save the borrower anywhere from $50 to $200 each month in PMI charges. This can also be used to achieve better price break points in the loan to value ratio to help the borrower get a better interest rate. Another benefit is the improved pricing or accessibility of "no income verification" mortgages. This is where the borrower cannot verify the income needed but may still obtain the mortgage by increasing the amount of down payment. If the borrowers have consumer debt with high monthly payments, preventing them from qualifying, they can use the seller contribution to pay off some or all of those debts. This allows them to now qualify or significantly reduce their overall monthly payments. Also, closing costs are virtually non-tax deductible. However, points are still tax deductible. If paying points, it is very smart to use a seller contribution because while the seller pays the points, they are still tax deductible to the buyer. A Seller contribution is easy to implement. There are no negative tax consequences to the seller except for a negligible real estate transfer tax in some areas. A seller contribution must be fully disclosed. The amount of seller contribution must not exceed the actual amount of closing costs. The buyer or real estate agent should check with the lender to make sure that they are within allowable limits, normally 3 to 6 percent of the of purchase price. |
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Ed Hlavac ed.hlavac@ctxmort.com |
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