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%)
Recording Fees
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.
Go tell it on the MOUNTAIN, Sister! But why should banks finance the professional fee incurred in the transaction? Why is it OK to finance that fee but not “prepaids”? What’s the distinction?
Craig,
Craig asks: Why is it OK to finance that fee but not “prepaids
Trying to come up with an analogy. Let’s say you buy a new TV. You can charge that, pay for that in installments with interest. Now you want a DVD player to go with…a Blue Ray…whatever…other things to make that TV function well and better. Do you buy the extras with cash separately, or pay for those batteries for the remote control by charging and paying interest on all of “it”?
Lets take that a step further…let’s say you go to one of those one stop shops and buy the TV…its added components…some dinner…some candy…and a pack of gum. Are you going to finance that pack of gum on your credit card and pay interest on that pack of gum? Yes they are all with you at the check out counter…but do you really want to finance all that?
Closing costs are the DVD and Blue Ray. (a one time and done cost of TV+, a “closing cost”)
The batteries for the remote control are questionable…a recurring expense, as the batteries will need to be replaced again and (a recurring cost of ownership…a “prepaid”)
Prepaids are at best the batteries (home warranty)…at worst they are the pack of gum (HOA Dues prorate for the month of closing).
One can ask for an estimating cost for all. It would help the buyers to estimate their required cost and the final closing costs too.
All for it, the lender can finance your commission and the seller can pay me on the HUD for getting the loan closed 😉
Requiring escrows is a simple loss mitigation strategy. It makes sense too.
If you stop paying your mortgage and the you haven’t escrowed then you have stopped paying your taxes and insurance well before that. When the lender forecloses not only do they lose out on the mortgage, but they have to settle the back tax liens as well.
By the way, we are financing your commission. It’s part of the sales price therefore it’s part of the loan.