When taking out a Colorado, New Mexico, or Utah mortgage, you need all the help you can get to get qualified and realize your dream of being a bonafide homeowner. First on the list are your loved ones. Your parents (or legal guardians) and adult children make unquestionable donors. With proper documentation, any lender will gladly accept the gift money and consider you a less risky customer.
Furthermore, there are services now that allow non-relatives to chip in so that one can buy a house. Financial technologies like crowdfunding are being explored to make homeownership a bit more affordable.
Another unusual source of cash is the owner of the property you are trying to buy. Although a seller is an interested party in the deal, a lender might accept their contribution to finish the transaction.
However, some rules need to be followed. To avoid breaking any of them, it is imperative to know what seller contributions are. Dispel the misconceptions below first.
They Are Not Allowed
Many people do not know they can ask the selling party to shell out for the closing costs of a mortgage. In reality, you can accept thousands of dollars to compel your prospective lender to move forward and minimize your out-of-pocket expenses.
Of course, it would be naïve to think that asking a seller to contribute financially works all the time. It could even backfire on you if the other party is entertaining many suitors.
A real estate sale is like a chess match where a lot of psychology is at play. Neither the buyer nor the seller wants to absorb the significant financial loss, so the negotiation is a tug-of-war over cash.
If you want the property that bad and you believe that you are competing with many serious buyers, asking for a seller contribution can hurt your chances. But if you smell desperation, then you can probably pitch the idea.
They Need to Be Repaid
A seller contribution is a donation, not a loan. If it is expected to be paid back, your prospective lender will likely not agree to include it in the equation. A lender is particular about your debt-to-income ratio, and taking out a loan under the radar is going to affect your ability to manage your mortgage payment no matter what.
They Have No Limit
Just because the seller is generous does not mean you can accept whatever amount. A lender decides how much the other party can contribute.
Generally, the percentage of the property’s price a seller can shoulder is based on the loan type. For instance, lenders offering FHA and USDA loans can allow up to 6% of the property’s value.
If you are planning to take out a conventional loan, the acceptable seller contribution is correlated to the size of your down payment. If you can put down more money, then your mortgage lender is more open about accepting a bigger seller contribution.
Seller contributions are strictly allowed to be used for closing costs only. If you are creative enough, though, you can utilize any surplus to negotiate for a more favorable deal, save you thousands of dollars on interest, and lower your monthly payment over the long term.