Let's Review those Closing Costs Again

Update: Today’s Washington Post (2/12) has a revised advertisement from the credit union that was the subject of this blog post, stating that they will pay $10,000 toward closing costs. Not the $100,000 that they previously advertised.

Up to $100,000 but there's a catch

ORIGINAL POST: When a real estate client came to me all pumped up because his Credit Union was offering to pay up to $100,000 of his closing cost, I thought we should sit down and review the typical expenses for a home buyer worksheet again.

I’m sure you can understand why he was so excited since $100k is considered a big chunk of change… even for those in the top 1%!

$100,000 is a rather excessive number

Our first stop was to look at their online estimate and then the fine-print in the offer.

Their online “closing cost estimator” had a nice breakdown and their estimate was reasonably close to my estimate.

In his case the estimated amount was about $14,500.

The fine print states:

Closing cost offer only good for 5/5 Adjustable Rate Mortgages (ARMs)**. You must use one of our preferred title companies to get closing cost credits. Closing cost offer is limited to $100,000 per loan. If application is withdrawn or does not close, the borrower pays all applicable fees. For New York properties borrowers are required to pay title insurance premiums and may use any title company to obtain the closing cost credit of up to $100,000. Includes lender’s fees, title fees, recording fees, and recording/transfer taxes. We do not pay optional owner’s title insurance.

One of the first items that I cover with my Vienna home buyers and sellers are typical transaction expenses. Spending time going over my cost estimate worksheets always puts the process in perspective and answers some tough questions.

But, you have to agree, an offer to pay $100,000 is going to get anyone’s attention.

Developing a winning negotiating strategy is part of the reason why I cover expenses, because you can include having the seller pay some of your closing costs in your offer to buy their home. This is perfectly normal in the Northern Virginia real estate market where homes are expensive (our average price in 2011 was $483,160) but, remember, you can only use the amount as allowed by the lender’s predetermined “normal” transaction costs.

In my real estate practice, having a consistent negotiating strategy is essential for my client’s success. But when this lender then suggested to my client that he ask the seller to give a closing cost credit then steam started to come out of my ears. Wait a minute, didn’t their advertising get him interested in their program because they were willing to pay the closing costs?

And now they are suggesting he get the seller to pay some… ?

wait a minute, this is BS.

This is a fairly complicated switcheroo-ski if you ask me. Keep in mind, if there is a seller credit then that amount will be used first before the lender steps up with their ~~$100,000~~ credit. That credit goes to closing costs and not to escrows, pre-paids or the down payment. If the credit is too much then the seller gets to keep her funds. In this case, I recommended to remain focused on the Sales Price without the distraction of a seller credit.

Besides wanting my clients to get treated fairly, I also want them to get the best deal and maximize their mortgage options. As a licensed real estate agent, I understand the FTC regulations restricting real estate agents about giving mortgage counseling… but I will do my best to point out a rotten egg if I smell one.

Have you reviewed the typical expenses of your real estate transaction?