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What, if any, are the limits on seller credits through escrow in California?

I originally posted this in "Selling", but was advised that this is more of a lender question - with some indication that the answer may vary from lender-to-lender.

Example...

I have a house, with a very neutral interior paint scheme. "Good" for selling, but probably not what others will want for "their home". How much can I credit through escrow towards a "post close" paint job? This could be more helpful to the buyer than an equivalent discount off the purchase price.

Back-in-the-day, I bought a house where the seller credited money in escrow against the down-payment. This was done to address issues with the house that the seller agreed to pay for, but I would fix after the sale. Essentially, the credit in escrow kept money in my pocket that I could then use for the needed repairs.

So, how far can this practice be stretched?
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May 24 2012 - Englewood
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Answers (12)

Profile picture for Pasadenan
So, if it was completed prior to close of escrow, and there is always a probability of a sale falling out of escrow, how does one make sure it is actually the colors the "real" eventual buyer selected?
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May 26 2012
Was the painting always completed prior to close of escrow?  Or was it done with a contractor's "gift certificate" for that work purchased by the seller?

The painting was completed prior to close (paid COD or from funds at the table and listed on the HUD-I) or, the painting was completed after close outside of compliance and/or lender approval.
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May 26 2012
Profile picture for Pasadenan
Wayne had an interesting relevant comment on the other thread:
Can seller concessions exceed closing costs?

"You left out the Lender. Escrowing for weather related issues - i.e. delay in putting on a new required roof because of weather conditions - is typically only escrows most investors will allow. If there is a specific program to allow a pool, repairs, additions, etc that would need to be approved by lender upfront. Doing an escrow at closing without lenders knowledge and agreement is not allowed."

But it seems to me that I used to see lots of ads stating "buyer's choice of paint to be provided by seller upon purchase, even for mortgaged purchases.  Was that only for "new construction"?  Was the painting always completed prior to close of escrow?  Or was it done with a contractor's "gift certificate" for that work purchased by the seller?
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May 26 2012
Profile picture for Go Huskers
Allowable IPC's on a principal residence or second
home:

LTV greater than 90% = 3%
LTV 75.01% – 90% = 6%
LTV 75% or less = 9%
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May 25 2012
Profile picture for SoCal_Engr
So, is the "lender consensus" that 6% is the reasonable limit on seller concession's through escrow? Of course, that only helps if the buyer had the 6% to start with (i.e., wasn't depending on seller concessions or rolling costs into the loan), but that's another story.

For clarification...

In my experience I originally described, I put 20% down and was already paying closing costs - so the seller credits were applied against the down. Don't know if rules have changed, or we did something out of the ordinary - but that's what I was assuming could still be done.
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May 25 2012
I would keep it simple and pay an appropriate amount of buyers closing cost .
They can use funds they were going to use for closing cost to pay for painting, etc.
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May 25 2012

The following applies to all agency loans.
I hate cut and paste but sometimes it is necessary (with my apologies):

B3-4.1-02, Interested Party Contributions (IPCs) (04/30/2010)

IPCs are either financing concessions or sales concessions. Fannie Mae considers the following to be IPCs:

·        funds that are paid directly from the interested party to the borrower;

·        funds that flow from an interested party through a third-party organization, including nonprofit entities, to the borrower;

·        funds that flow to the transaction on the borrower's behalf from an interested party, including a third-party organization or nonprofit agency; and

·        funds that are donated to a third party, which then provides the money to pay some or all of the closing costs for a specific transaction.

Fannie Mae does not permit IPCs to be used to make the borrower's down payment, meet financial reserve requirements, or meet minimum borrower contribution requirements.

<Down payment and minimum contribution are listed separately so there is no confusion to the rule.>

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May 25 2012
Profile picture for Pasadenan
"The down-payment must be from the borrower's own money, an approved gift, or approved 2nd financing source." -

For the minimum down-payment required... as pointed out by
Norm D Plume

"Operative word here is "increase" the down payment and not applied towards the minimum required down payment"
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May 25 2012
The Seller and/or interested 3rd party CANNOT contribute to the down-payment.  The down-payment must be from the borrower's own money, an approved gift, or approved 2nd financing source.

Repair escrows are seldom approved unless they are weather delayed or the subject property is an REO.  Banks don't want to be in the middle of a "work" dispute" or potential new lien.

Concessions in excess of Actual closing costs & pre-paids is a contribution which cause a dollar-for-dollar reduction in the max loan amount.
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May 25 2012
Profile picture for Pasadenan
There appears to be two separate issues.... too bad that Professor Brown's profile has been disabled as he is up to date on the issues, especially for California, and tends to tell it like it is.

But from what Clay posted on the thread:
Can seller concessions exceed closing costs?

Apparently the Underwriters will accept seller concessions on the HUD-1 up to 6% of the purchase price, for closing costs, prepays, down-payment exceeding minimum required, and small repairs paid to a contractor, typically up to a couple thousand dollars for something cosmetic.

The other issue is repairs the seller agrees to that are part of the agreement after inspection.  If the repairs are not completed by time of close of escrow, funds can be held in escrow for those repairs, to be paid for through the escrow account.  Thus it appears to be possible to hold the funds in escrow for the painting that will eventually be done.  But I'm not familiar with how that should be written up on the contract agreement.
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May 25 2012
Profile picture for hpvanc
If you run the allowance through escrow doesn't it have to be disclosed in the HUD-1?  Maybe there is a problem with wholesaling the loan, so that may mean it can't be easily accomplished when going through a mortgage broker or a depository institution that is immediately wholesaling the loan instead of funding it.  It also may mean that it has become uncommon enough that not a lot of agents or lenders know how to correctly write the contract to do it. 

Personally I think the idea, of what amounts to a decorating allowance, could work in a sellers favor, it gives a little bit of the flexibility on taste, that is available when "building" to resale houses.  However I think there are a lot of people with blinders on, both within the industry, and among consumers.
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May 25 2012
Profile picture for Go Huskers
Most people will shy away from questions like these because they are definitely not allowed through conforming guidelines and may be illegal in some states.

Ignoring the legality for a moment, I refer you to the Fannie Mae Selling guide section B3-4.1-03, Types of Interested Party Contributions (IPCs)

"Undisclosed IPCs

Mortgages with undisclosed IPCs are not eligible for delivery to Fannie Mae. Examples of these types of contributions include, but are not limited to, moving expenses, payment of various fees on the borrower's behalf, "silent" second mortgages held by the property seller, and other contributions that are given to the borrower outside of closing and are not disclosed on the HUD-1 Settlement Statement."


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May 24 2012
 
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