Ashley Simmons, a first time home-buyer, felt overwhelmed when she came to us. As is often the case, no one took the time to explain the loan process or her loan options to her. Additionally, Ashley’s purchase contract was written in a manner that did not make sense for her situation.
A common strategy to lower a buyer’s cash to close is to ask the seller to pay for some of the buyer’s closing costs. The buyer will increase their offer by the amount they want the seller to pay, so it makes no difference to the seller. Done properly, buyers can structure their contract and financing so they only need to come to closing with the down payment.
In this case, the property was a HUD foreclosure. After a bidding war, the purchase price exceeded the HUD appraised value by $4,000. That meant Ashley had to come to closing with the down payment AND the amount over the HUD value. The contract included seller paid closing costs of $4,000 that now provided no benefit. In fact, the seller paid closing costs excluded a lender credit to pay for her closing costs if she wanted to go that route.
We suggested Ashley lower the purchase price by $4,000, eliminate the seller credit, and use a lender credit to pay for her closing costs. Her cash to close and the seller’s net proceeds were unchanged, but the lender credit saved Ashley thousands!
Raising the rate on Ashley’s loan 0.500% only increased her payment by $48 per month, but gave her a lender credit of over $5,500 covering all of her closing costs. She had to be in the house over 11 years to break even at the lower rate and about 22 years to double her money. Not only did Ashley want to use her cash to fix up the house instead of spending it on closing costs, it was highly unlikely she would be in that house for more than 10 years.
The seller credit might have made sense with original contract offer price, but once multiple offers drove the price over the HUD value, everything changed. More importantly, the other lenders Ashley spoke to were only trying to impress her with a low rate even though it meant higher loan fees. They failed to ask if the tradeoff of higher fees for a lower rate made sense for her situation and they never even looked at the contract. Finally, at the lower rate we would have saved her over $2,000 in closing costs compared to the other lenders, but as you can see, the right loan structure is what Ashley really needed.
At Huettner Capital, we take the time to explain the loan process and answer your questions. We show you all of your options and help you compare them. Finally, we take a step back and make sure each option makes sense.
Please contact us to see how we can help you.