“The homebuyer is putting down 20% but still wants seller assist. Why?” This is a common question. The answer shows the value of using other people’s money in a real estate transaction.
Every transaction has certain fixed costs such as appraisal, credit report, title insurance, transfer tax, real estate taxes and insurance. We collectively refer to these as “settlement charges.” To maximize the buyers’ available cash, we sometimes need to get creative. This is where the seller assist can be useful.
Here’s an example*:
- List price of the home is $265,000
- Real estate taxes are $5,400/year
- Insurance will be $1,000
- Buyer has $55,000 cash available
A typical buyer will negotiate for a lower price, so let’s say the seller agrees that $250,000 is a fair deal. Let’s also assume the total settlement charges are $15,000 (typically 5-6% of the purchase price in PA, including the taxes and insurance). This means that after paying the settlement charges, the buyer’s available cash for the down payment will end up being only $40,000.
That can certainly work – the buyer would have 16% down and a mortgage of $210,000, with a principal and interest payment of $1,033.07 (30 year term at 4.25%). However, since there is less than 20% down, Private Mortgage Insurance (PMI) will most likely be required. This will add an estimated $47.25 to the payment and be in place for approximately seven years, equaling an additional cost of nearly $4,000.
An alternative scenario would be to use seller assist:
Make the offer $265,000 (we will assume it will appraise for the listed price), but ask for $15,000 in seller assist**. This results in a net to the seller that is the same ($250,000 for the home), but allows the buyer to have enough money to use all $55,000 as down payment, resulting in a $210,000 loan amount. The $15,000 from the seller would cover all the settlement costs and PMI would be avoided because the $55,000 would be more than 20% down. As you can see, for the same cash out of pocket, the buyer ends up borrowing the same amount, but saves almost $4,000 in PMI costs!
Please keep in mind, this is a very simplified example and there are other considerations to take into account, but it often works to everyone’s benefit. The same concept can allow someone with little or no money saved to use one of the low down-payment loan options and use a seller assist to cover the settlement costs, allowing the customer to own a home instead of renting.
*For this example, I assumed excellent credit and sufficient verifiable income and assets to qualify for this purchase. To find out what you qualify for or to discuss the best use of your money in a real estate purchase, contact us at 877-723-5571 or mortgages@univest.net.
** The amount a seller can contribute varies, please be sure to check with a mortgage professional before making any offers.
