Author’s note: This is a selection from my new book, How To Buy A Home and Not Lose Sex: Find the Best House, Make the Best Offer, and Keep Your Love Life, which you can purchase on Amazon by clicking here.
In past weeks I’ve covered the down payment, the cost of a Realtor, earnest money deposits, prepaid closing costs, flood elevation certificates, insurance, escrows, title insurance, lender fees, PMI, funding fees, add-on fees, sales tax, and last week (for the second time in this series), freaking out about closing costs! This is the LAST installment of this series and it covers getting around closing costs, your credit, and why bad credit will keep you from getting a loan.
Getting Around Closing Costs
You might have enough to make the down payment on a house, and based on your income you might qualify for the loan. But once you factor in the closing costs, it might put you over a line where you can’t afford the house you want.
Or let’s say you have enough for the down payment and closing costs, but it wipes out your entire savings.*
If you find yourself in that situation, you might be able to ask for the seller to pay for your closing costs.
“Is this really possible?” you gasp. “Someone else paying for my closing costs?”
Of course it’s possible; you just have to ask.
Let’s say you want to buy a house for $140,000, but in order to not wipe out your savings, you need $5,000 in closing costs.
So you make an offer of $145,000, and in the terms of the offer you put in something like “Seller agrees to pay $5,000 in buyer closing costs and prepaids.”
It’s as simple as that, but there are a few caveats.
The first is that you are going to pay really close to full price, or even over full asking price.
The seller has you over a barrel, you see. If you want to buy his house, you need closing costs. He’s not going to give you a low price and closing costs.
The second thing to consider is that the home has to appraise at the higher amount for the seller to give you back the closing costs. In the example above, the house would have to appraise for $145,000.
If it doesn’t, you go back to the drawing table.
Let’s say the home appraises for $143,000. The seller might accept the $143,000, but to preserve his bottom line he might only agree to pay for $3,000 in closing costs (meaning you have to come up with the extra $2,000).
In theory, the seller could still give you the full $5,000 (it’s his decision), but typically sellers tend to overvalue their home no matter the amount at which it sells.
In this example, it would be normal for the seller to start thinking he could have sold his house for $145,000 without paying the closing costs (even if it was only priced at $140,000 to begin with). He would start thinking he’s getting ripped off somehow by paying the closing costs.
He would think this even if the home had been on the market for six months and you were the only person who viewed it, and the only person who made an offer on it. This is typical seller behavior.
Whatever the decision, it will take the buyer and seller working together to make it happen.
And that’s why you will need a Realtor: It’s their core role to help you negotiate these things.
*You want at least six months of mortgage payments saved up as a safety net in case something happens. You do not want to move into a new home with an empty bank account.
“I Have Enough Money to Put Down, but Nobody Will Give Me a Loan!”
I got a call once from an irate buyer who just wanted to vent. This wasn’t a customer of mine, just someone who saw one of my YouTube videos and thought I might lend a sympathetic ear.
The gist of the complaint was this: “I have thousands of dollars to put down, and no one will give me a loan!”
The person was self-employed, which can be an issue. Lenders want to look at net taxable income, for example, instead of the gross income or the cash flow a self-employed person generates.
With some questioning, I was finally able to get to the root of the problem: The person on the phone was, shall we say, credit challenged.
Should this be an issue if a person has a significant down payment? In this case, it could have been that their credit was a lot worse than they let on.
Credit vs. Income
There are two basic things a lender looks at when you apply for a loan: income and credit.
Income represents your ability to pay. In other words, do you have enough money to make the loan payment every month?
Credit represents your willingness to pay. In other words, if you have the money to pay off the loan, will you pay it off?
Credit measures how timely you’ve been with things like credit-card payments, car payments, rent payments, house payments, etc. If you’ve been late on payments (regularly), it’s going to make a bank less willing to work with you. Would you loan money to someone who paid you back late all the time?
Then there are these things lenders call “charge offs.” A charge off is where a bill gets sent to collections because it never got paid.
Chances are, even if someone is willing to give you a loan, you have to take care of any charge offs first before they will actually lend you the money.
If you have a lot of charge offs, you’re going to need to be patient, rebuild your credit, and try again in a year or two.
Then there are foreclosures, bankruptcies, and the nuclear bomb of credit ratings—eviction.
In the wake of the housing crash and the Great Recession, lenders, to a degree, understand foreclosure and bankruptcy. In fact, if you are a veteran eligible for a VA loan, you might only have to wait two years past a bankruptcy or foreclosure to get another loan.
But eviction is a situation where a renter failed to pay the rent, and then failed to move.
In an eviction, a renter fails to move so much that the landlord has to file a case in a court of law, pay legal fees, get a judge to order the renter to move, and then have a sheriff’s deputy physically go to the property and remove the renter. And then the landlord has to move the renter’s stuff to the curb.
Eviction is bad. Everybody understands when someone falls on hard times. What people don’t understand is when a person screws someone else because they fall on hard times.
One more thing that could be as potentially bad as eviction?
A criminal conviction for writing bad checks.
If you are thinking about buying a home, please consider hiring myself and my team as your Realtors. We can help you find the best house and make the best offer. Contact me at Sean@StAugTeam.com or my partner Kate at Kate@StAugustineTeam.com.