So much for curb appeal. Sure, it takes a welcoming presence to lure homebuyers to your door. But in today's market, it often takes a fistful of cash to get them to the table.
When they come to the closing table, sellers are increasingly picking up the tab for all the ancillary costs buyers incur when purchasing a home.
These "closing costs" can include a long list of charges, from relatively inexpensive document copying fees, to more hefty tabs for reserves for property taxes and homeowner insurance.
Closing costs for the buyer might run several thousand dollars or more.
"This is definitely the age of seller concessions," says home appraiser T.J. McCarthy, an instructor at the Appraisal Institute, Chicago.
In any "buyer's" market, sellers yield to price cuts and other demands, like leaving behind the hall chandelier.
But writing a four- or five-figure check to cover buyer's closing costs is a concession that's particularly needed to cinch a sale in today's tight credit environment.
Lenders have gone back to insisting on an old principle: Every homebuyer needs a down payment.
Coming up with down payment cash is enough of a problem, especially for first-time buyers, without having to dig further for closing cost cash.
Federally insured FHA mortgages allow the lowest down payment -- 3 percent -- of the purchase price. That will increase to 3.5 percent at the beginning of 2009, but FHA mortgages still offer the lowest down payment, with other loans requiring at least 5 percent. That's a key reason why FHA mortgages are quickly gaining popularity.
Until October 1, 2008, home sellers could essentially contribute an FHA buyer's down payment by making a contribution to a nonprofit, which in turn would provide a down payment grant to the buyer.
While that practice is now prohibited, FHA rules do allow sellers to give up to 6 percent of the home's purchase price for closing costs. "The thing to remember is that they can give up to 6 percent, but if closing costs only total 4 percent, that's as much as a seller can give," says Don Frommeyer, board member of the National Association of Mortgage Brokers.
"We have seen a huge rise in seller contributions," says Minnesota Realtor John Anderson, past chair of the federal housing committee of the National Association of Realtors.
"In better than half of my deals lately, sellers are paying closing costs," Anderson says.
As long as a market giving buyers the upper hand and tight credit conditions persist, this trend will stick, observes JoAnne Poole, past president of the Maryland Association of Realtors.
"I try to educate sellers to be realistic," Poole says. "They may be expected to help buyers with closing costs."
The total tab for closing fees can vary considerably. Local real estate transfer taxes, for instance, can add substantially to the total in some areas. And the time of year a purchase is transacted can also impact costs, since lenders may demand more or less property tax be placed in escrow, depending on when they expect the next bill to come due.
In essence, when a seller covers closing costs, he simply nets less from the sale, just as he must subtract the real estate sales commission from their profit, McCarthy says.
Both closing fees and sales commissions are costs related to the purchase, but they do not directly reduce the purchase price, he adds.
When sellers contributed down payments to buyers through nonprofits, it directly reduced the purchase price, which caused appraisers to worry that recorded sales values were falsely inflated.
Although seller-contributed down payments are now disallowed, FHA rules do allow buyers to receive a cash gift for their down payment from a close relative or friend, and rules still allow buyers to receive grants that aren't contributed by the seller, but directly from charities and housing nonprofits.
Still, instances can occur when lenders frown on sellers chipping in big amounts for closing fees.
Red flags may pop up, especially in non-FHA loan transactions. Indeed, sellers can't even contribute to closing fees unless the buyer is making at least a 10-percent down payment with a conventional, non-FHA loan.
But those stricter rules on non-FHA transactions don't really get in the way much of the time with buyers' requests for closing assistance. That's because it's the many buyers with a limited amount of cash who need both a low down payment FHA loan and seller help with closing costs.Mortgage rates continued to race downward, with the 30-year fixed hitting its lowest level since March 2004. The average 30-year fixed-rate plunged 38 basis points, to 5.42 percent. A basis point is one-hundredth of a percentage point. Rates on the 30-year fixed are now within striking distance of the all-time low in the Bankrate survey -- 5.28 percent -- from June 11, 2003.
The average 15-year fixed -- a popular option for refinancing -- fell 21 basis points, to 5.3 percent. The average jumbo 30-year fixed plummeted 39 basis points, to 6.98 percent.
Adjustable-rate mortgages also sank. The one-year adjustable-rate mortgage fell 18 basis points, to 5.91 percent. The popular 5/1 ARM dropped 33 basis points, to 5.84 percent.
(E-mail Marilyn Kennedy Melia at editors(at)bankrate.com)
(Distributed by Scripps Howard News Service www.scrippsnews.com)
REAL ESTATE WATCHMust credit bankrate.com
Post new comment