What exactly will seller paid "closing costs" cover? (insurance, loan)

[sheriwx]

Seller has agreed to pay 3% ($4650) toward closing costs.

Now, as we are comparing lender rates, we find that one lender's "closing costs" equals $3403, but if we buy down the rate the closing costs will be $5315.

So, is it wiser to buy down the rate so we can use the full amount they've offered for closing costs, or will we get the full amount even if we don't buy points?

Hope this makes sense. I'm very new at this and want to make the best decision. Any advice is appreciated!

[ShanetheMortgageMan]

The amount of credit (be it from the seller, your real estate agent, or the lender/mortgage broker) cannot exceed the amount of your settlement costs. Settlement costs include the closing costs, such as appraisal fees, lender underwriting & processing fees, escrow/attorney/closing fee, title insurance, recording fees... as well as pre-paid items, such as the 1-year of homeowners insurance, pre-paid interest, and funding of your escrow account. Closing costs + pre-paid items = settlement costs.

If the settlement costs are only $3,403, and buying down the rate would increase them to $5,315, then you'd have to come in with the $665 difference. Probably is worth it, although you'd have to do the math and figure out when the break even point would be (take the difference in monthly savings between the bought down rate & non-bought down rate and divide it into $665, that will equal how many months it'll take to break even). However on a $139,500 sales price I am leery that the entire settlement costs would only be $3,403, seems a bit low, although it is possible if no escrow account was being set up, you were closing towards the end of the month, and the homeowners insurance premium is pretty low. Anyway look at page 4 of your loan application, in that section it will list the "Details of Transaction" and will break down the closing costs + pre-paids. If the total of those two amounts is $3,403 then you'd leave the $1,247 difference "on the table" if you don't buy down the interest rate... if the total of those two amounts exceeds $4,650, then buying down the interest rate would be fully on your own dime.

[sheriwx]

What a great answer! Thank you!

The $3403 is just what was labeled "closing costs" on my estimate page. There is also a section called "Prepaid Items/Reserves" with the amount of $5113. I didn't know if the money for closing costs provided by the seller was allowed to go toward the Prepaid Items/Reserves, because the bank (seller) made us sign an addendum that states:

"Seller paid Buyer Closing Costs shall only be used to pay for non-recurring items. Any recurring items and/or closing costs are the responsibility of the Buyer. These items, which are excluded from reimbursement and/or costs include, but are not limited to:

Any advance HOA dues, assessments, or pro-rations.
Any advance tax payments or pro-rations.
Any additional commissions, transaction fees or management fees paid to the listing agent or buyer's agent thatare not part of the listing agreement."

What do you think? Does that addendum effectively prohibit me from using the closing cost money for ANY of the Prepaid/Reserves section?

[ShanetheMortgageMan]

Welcome. It does appear that the seller bank addendum would prohibit it being used for the prepaid items/reserves, and so you should look into buying the rate down. You may also want to contact the title company/closing attorney who is doing the closing to see if they'd allow the credit to be applied towards the prepaids/reserves. I've seen similar addendums before, and I've seen the credit still be allowed to be counted towards the prepaids/reserves. $5,113 seems a bit high for prepaids on a $139,500 sales price, unless you are buying in Texas, New York, Florida or someplace with pretty high property taxes & insurance costs.

[sheriwx]

The big part of the prepaid/reserves is $3365 for the upfront FHA MIP (which I don't fully understand). The rest is a year of Hazard insurance, and 4 months reserves of taxes and hazard insurance.

The sale price is actually $155,000.

[ShanetheMortgageMan]

You are right, my bad on the math figuring out the sales price.

The $3,365 is actually financed into the mortgage amount. There is the base loan amount, which is $149,575, and then the upfront mortgage insurance premium (UFMIP) is 2.25% of that ($3,365), bringing the total loan amount up to $152,940. You can also choose to pay the UFMIP out of pocket instead of financing it all, can't finance only a portion of it though. The UFMIP shouldn't be a part of the prepaids/reserves as it's technically neither, but this lender seemed to have just lumped it in with them. Nothing to worry about, probably just how they portray the costs to their clients. $1,748 seems more appropriate for the prepaids/reserves estimate.

[sheriwx]

Could the leftover amount from the seller's closing costs be applied to the UFMIP at all, since it isn't technically a prepaid?

[ShanetheMortgageMan]

sheri, I don't see why it couldn't, but it'd only cover a portion of the UFMIP, and it either has to be entirely financed or entirely paid out of pocket, so you'd have to come up with the remaining portion of the UFMIP the seller credit doesn't cover.

[Hoftruck]

Looking over the Fee Worksheet and see where I will be paying 2,946.00 in closing cost. Then on section Funds needed to close there is Total Estimated reserve prepaid costs of 1,302.87$. not sure what this fee is for? Thanks

[rrah]

Prepaid costs typically include the pro-rated mortgage costs, taxes and insurance costs. Honestly, your lender or real estate agent should explain this to you. Rather than pull up a 4.5 year old post, you would be better off starting your own, new post with some context. I am assuming you are a buyer.