What an Underwriter does NOT want to see when viewing Chicagoland Real Estate Contracts

Recently, I've seen some repetitive scenarios popping-up on my mortgage clients' Sales Contracts, as they pertain to "concessions" and property repairs. Several of the transactions I've seen have had Home Inspection issues arise. Each time this has set-off the back-and-forth of timely negotiations.

I think it's important for clients to understand that ... from an Underwriter's viewpoint ... the ONLY allowable Seller-paid concession on a Sales Contract is for Closing Costs and certain pre-paids, such as Interest, Homeowners Insurance, and Escrow Deposits.

In other words, credits or escrows established and intended for "future" repairs to be made by new Buyers are not allowed WITHOUT effecting the Sales Price, Appraisal, and Loan Transaction.

Lending Guidelines state: Contract clauses or Riders or Addendums that reference a "Repair Credit" must be treated as "Price Concessions" and are to be DEDUCTED from the Sales Price dollar for dollar.

To better illustrate this Lending Guideline, consider the following scenario:

A house sells for: $305,000

But the Home Inspection, made after the Sales Contract has been signed, revealed that a home repair costing $5,000 needed to be made.

If written into the Sales Contract ... or the Contract is amended this way, the loan amount consideration (% of Down Payment) now has to be based upon $300,000, not the original Sales Price shown above.

This changes the Borrowers' cash position in the following way:
$305,000 Sales Price
20% Down = $61,000
Loan Amount = $244,000

BUT ...

Guidelines state that the Loan Amount has to be capped at $240,000 (to avoid Mortgage Insurance) , ( the amount representing 80% of $300,000, the Contract amended price.) So in effect, it's as though the Buyers and Sellers agreed to a Sales Price of $300,000 and no Credit was being shown from the Seller.

However, if the Sales Contract had been written to contain the following: "$5,000 Closing Costs Credit from Seller to Buyer at Closing" ... the original Sales Price of $305,000 WOULD be allowed and unaffected. The Buyer would just receive the $5,000 Credit at Closing time, which would reduce their overall total cash needed to Close.

The math equation for this is ... Down Payment plus Closing Costs minus any Allowable Credits.

My advice when these situations occur is this: Write these Sales Contracts with Seller-paid Closing Costs factored in, if at all possible. Especially if you are concerned that there may be property condition concerns that arise. Issues that might raise a red flag? The sale is an older home. The property has a worn roof. There's suspicions of mold or more obvious disrepair or defect, etc.

I understand that Chicagoland Brokerages have their own method of writing these Sales Contracts. And in those instances, I recommend that you follow your Brokerage Policies after you have spoken to Legal Representation that may be involved within the transaction.

What an Underwriter does NOT want to see when viewing Chicagoland Real Estate Contracts ... While all the above may seem to be a simple matter of semantics, rules are rules and Guidelines must be followed. Not structuring the Real Estate Contract in the right manner can cause a deal to be unsalvageable ... or at minimum, cause delays in the process. And none of us want that ...

* Looking to Buy or Refinance a home in Joliet, Will or DuPage County, or elsewhere in the Chicagoland area? Contact me today! I'll put my 36+ years of mortgage experience and expertise hard to work on your behalf immediately.

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