How Mortgage Lenders Deal With Credits
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM # LAW 756
By Ilyce R. Glink and Samuel J. Tamkin
Summary: A ThinkGlink reader is buying an apartment building and the seller has agreed to give him a credit for repairs. Ilyce and Sam explain why the mortgage lender may not like this idea.
Q: I am interested in making an offer on a multi-family building. After looking
at the property during a showing, I noticed that it will require extensive cosmetic
repairs.
Also, the roof needs repairs. I'm sure my home inspector will note the same problems I have seen, and perhaps some others.
The seller is willing to offer a $20,000 credit at closing to cover my closing costs and repairs. The building is listed for $125,000. Will the lender limit how much credit a seller is willing to give in order to make the transaction go through? Should all of this be included in the written offer?
A: You are wise to ask in advance of making your offer. A $20,000 credit on a $125,000 purchase price is about 16 percent of the purchase price. The lender will almost certainly have a fit if you were to try to close this transaction and take the money as a credit.
More likely, the lender would only lend money to you on the basis of the net purchase price – that is $125,000 less the $20,000 credit, or $105,000.
Your other option is to approach the lender and advise them that the $20,000 will go towards the repairs needed at the property and that the money will not flow to you.
To appease the lender, you may be able to set up an escrow account that would directly pay the contractors as they make repairs and improvements to the property. If the lender has a comfort level with the appraised value of the building and the improvements the building needs, the lender may be willing to allow you to set up the escrow without adjusting the amount of your mortgage.
Good luck.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your Home Faster and For More Money In Any Market. If you have questions for them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce’s website www.thinkglink.com
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