If you ask me, lenders are still not tight enough!
I’m OK with closing costs being financed aka paid for by the seller. But ONLY IF you define TRUE closing COSTS vs “prepaids” PLUS closing costs.
As an aside...if lenders would only let the buyer finance their own RE commission and not the total of the buyer and seller commissions…well…commissions would change overnight. Simple as THAT!
This comes back to haunt the buyer when they are selling…as so many costs were built into the price that they have to cover both the selling and buying costs…when they sell. That’s usually 13% on a combined basis! If you finance 3% to 4% on the way in and have seller costs of 9% to 10% on the way out…you are underwater by a LOT, even if you can sell your house for what you truly paid for it…the NET vs GROSS purchase price. The price without all the financed buyer costs.
Let’s look at a few examples that lenders should NOT allow to be financed…but do.
1) The first full year payment of the buyer’s annual Fire-Hazard insurance policy. (prepaid recurring annual expense)
2) The buyer’s prorated portion of the current year Real Estate Taxes .(prepaid recurring annual expense)
3) The buyer’s prorated portion of the HOA Dues. (prepaid recurring annual expense)
4) The current month’s interest (per diem) on the mortgage. (prepaid recurring annual expense)
It’s OK to finance the one time only fees like
Title Insurance (once and done)
The BUYER’S Real estate Commission expense…not the SELLER’S Real Estate Commission expense. It is NOT even the buyer’s cost of service. Why is it allowed to be IN the Buyer’s Mortgage?
The buyer’s 50% cost of Escrow Services (Seller pays the other 50%)
I’m a little ambivalent about MIP and PMI up front fees. Since that protects the lender in the event of a shortage from amount owed to new sold price…the insurance has to get in there. So I’d likely call that a true closing cost vs prepaid. Prorate of the monthly…not worth getting into a discussion about…so I’m OK with MIP and PMI up front and prorated monthly being financed.
There’s a whole mixed bag of lender fees that should be examined carefully. Needless to say there was a time when lenders would allow CLOSING COSTS to be financed, but NOT “PREPAIDS”.
If we are truly serious in this Country about preventing future homeowners from being underwater when home prices stay FLAT…we need to stop allowing for SO many things being “financed” on the way in and out of a property purchase and sale.