The Seller Credit That Will Not Fit
Purchase price is $400,000. The buyer is putting 5% down on a 30-year conventional loan. Gross monthly income is $8,900; estimated PITI is $2,610; other monthly obligations are a $410 car payment and a $280 student loan. The seller has agreed to credit $18,000 toward the buyer's closing costs and prepaids. The buyer's actual closing costs and prepaids total $13,200. The lender's seller-concession limit at this loan-to-value tier is 3% of the sales price. The appraisal comes in at $400,000. The buyer asks whether the extra money can simply be handed over at closing as cash.
1. Compute the loan amount, LTV, maximum allowable seller concession, and both debt ratios.
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Loan and LTV
- Down payment: 5% x $400,000 = $20,000
- Loan amount: $400,000 - $20,000 = $380,000
- LTV: $380,000 / $400,000 = 95.0%
Concession cap
- 3% x $400,000 = $12,000
- Also limited by actual costs: $13,200
- Usable credit: lesser of the two = $12,000
Debt ratios
- Total monthly debt: $2,610 + $410 + $280 = $3,300
- Total (back-end) ratio: $3,300 / $8,900 = 37.1%
- Housing (front-end) ratio: $2,610 / $8,900 = 29.3%
Both ratios sit comfortably inside typical conventional guidelines, so the borrower's income is not the obstacle. The obstacle is the size of the credit, not the ability to pay. Note that at 95% LTV the borrower should also expect mortgage insurance, which is not in the $2,610 PITI figure and will move the front-end ratio up.
2. Can the $18,000 be used? Explain what happens to the excess and respond to the buyer's cash-back request.
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Only $12,000 can be applied. The credit is capped at the lower of actual closing costs and prepaids ($13,200) and the program's 3% limit ($12,000). The remaining $6,000 cannot be applied to the transaction at all.
On the cash-back question: no. A seller credit is a financing concession, not a payment to the buyer. Handing the buyer $6,000 at closing would be an inducement that violates the lender's guidelines, would have to be disclosed on the closing disclosure, and would put the loan and the licensee's involvement at risk. Do not draft an addendum that routes money to the buyer.
Realistic options for the $6,000:
- Price reduction. Cleanest, lowers the loan amount, lowers the payment, and reduces the concession problem proportionally.
- Apply toward a permanent or temporary rate buydown if the loan program permits it and it is disclosed and priced within the same concession limit.
- Seller keeps it. The buyer simply does not get the benefit; that is a negotiation, not a violation.
- Reallocate to prepaids the buyer would otherwise fund, such as taxes and insurance escrows, if the lender's calculation allows them within the cap.
The buyer's agent should re-run the numbers before the appraisal and loan file are locked, not after.
3. The buyer's agent suggests raising the price to $412,000 so the seller can credit 3% of the higher number. Evaluate that plan.
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Work the arithmetic before endorsing it.
- New price: $412,000
- 3% cap: $12,360, an increase of only $360 over the current cap
- New down payment at 5%: $20,600, so the buyer pays $600 more cash up front
- New loan: $391,400, so the buyer pays interest on $11,400 more principal for 30 years
- LTV stays at 95%, so nothing improves on the mortgage insurance side
For $360 of additional credit, the buyer pays $600 more down and carries a larger loan. That is a bad trade unless the higher price buys something else.
The larger risk is the appraisal. The appraiser must support $412,000 on a property the market just valued at $400,000. If the appraisal comes in at $400,000, the LTV is recalculated on the lower value, the concession tier may change, and the whole structure collapses late in the process.
Better approach: keep the price honest, apply the maximum $12,000 credit that the program allows, and either reduce the price by the $6,000 difference or negotiate it away. Inflating price to smuggle in a concession is the kind of workaround that trips appraisal, underwriting, and disclosure rules simultaneously.