- The Washington Times - Friday, April 18, 2008

The goal of home sellers is to make money, either so they can purchase another home or invest their profits in other ways, but sometimes, especially in a buyer’s market like this one, you have to spend money to make money. As home sellers search for ways to make their home enticing, they start by cleaning and decluttering and then establishing what they hope will be a fair price. After these steps, sellers can look into creative financial incentives that may bring in buyers.

“The current credit crunch means that buyers are having a harder time qualifying for a loan,” says Jason Klein, president of City Line Mortgage LLC in Bethesda. “Most lenders are leaning toward requiring 10 to 20 percent down payments, with a few loans allowing 5 percent down.”

Buyers in a cash crunch will be more likely to choose a home when the seller is offering financial incentives such as closing-cost assistance. However, lenders do set limits to how much a seller can provide for their purchasers.

“Specific loan programs have specific guidelines for what sellers can offer,” Mr. Klein says. “Typically, seller concessions are limited to 2 to 3 percent of the purchase price. In this market, that can be a powerful tool. Basically, a 3 percent concession covers all closing costs, so the purchasers can keep all their cash for a down payment. The higher the down payment, the more likely it is that the buyers will qualify for a loan.”

Barbara Sheehan, assistant vice president of mortgage products for Navy Federal Credit Union in Vienna, says that seller concessions vary, along with the purchaser’s down payment in addition to the loan program.

“Generally, the higher the down payment, the higher the allowed seller concession, anywhere from 3 to 6 percent of the purchase price,” Ms. Sheehan says. “But if the purchasers are putting no money down, the seller concession must be smaller.”

Ms. Sheehan says that some 95 percent loans are still available and that VA financing can be obtained with as little as a 4 percent down payment, but lenders do set limits on how much sellers can provide based on the loan product.

While sellers sometimes want to throw in a car as an incentive to purchase their home, Ms. Sheehan says these items should be listed on a separate bill of sale.

“If something like a car or a boat is listed in the contract as part of the property, then the lender will either ask the contract to be rewritten or will reduce the loan-to-value based on that much of the sale price,” Ms. Sheehan says.

Ms. Sheehan says that standard lending rules are written so the home buyers put some of their own money into the purchase rather than relying on gifts and financial incentives from other people.

“Generally, borrowers have to have some skin in the game,” she says. “At least 5 percent of the value of the home should come from the buyers directly. If the buyers don’t have any skin in the game and property values decline, it is just too easy to walk away from the house.”

Patricia Marshall, a senior loan officer with Bank of America in Columbia, recommends that sellers look into seller-funded gift opportunities.

“While sellers cannot give a down payment gift directly to buyers, they often don’t realize that there are programs available that allow them to provide down-payment assistance through a third party,” Mrs. Marshall says.

The Nehemiah Program (www.nehemiahcorp.org or www.getdownpayment.com) provides gift funds for qualified home buyers that can be used for closing costs and down payments.

Gift funds up to 6 percent of the sales price are available for buyers who qualify for an eligible conventional loan or FHA loan. Loan limits for FHA loans in the Washington area have been raised to $729,750, allowing more buyers to obtain financing for homes with this type of loan.

The Nehemiah Program gift funds do not need to be repaid, and there are no restrictions on the location of the home or the buyer’s income. Buyers are eligible for the gift when the seller makes a contribution to Nehemiah Corp. of America that is equal to the gift amount.

Sellers must also pay a processing fee. The Nehemiah Program suggests that sellers opt to market their homes with this program to provide a financial incentive to buyers who may lack the cash to purchase a home but can qualify for a mortgage.

The AmeriDream Down Payment Gift Program offers another option for sellers to help buyers afford to purchase their home (www.ameridream. org). Buyers are eligible for both down payment and closing-cost assistance through this program if they can qualify for a mortgage but lack the cash needed at the closing.

There are no income, asset or geographic restrictions on buyers, but the buyer must be planning on living in the home. The AmeriDream Program is meant for borrowers with good credit who have been unable to save enough money for a down payment.

The funds provided to such borrowers are a gift that does not need to be repaid. The main requirement is that buyers qualify for a loan program that accepts gifts for a down payment, such as an FHA loan. Additionally, the home seller must agree to participate in the program.

Typically, the gift is 3 to 6 percent of the sales price, although it may go as high as 10 percent. It must be used for a down payment, closing costs or other allowable expenses.

Sellers can enroll their home in the AmeriDream program and pay a fee at the settlement table, which is based on the sales price of the home. The fee is calculated when sellers enroll their residence in the program.

An additional benefit to buyers of the AmeriDream program is that the DreamKeeper Mortgage Payment Protection Program comes along with the gift, providing insurance that covers principal, interest, taxes and insurance up to $2,000 for four consecutive months if the borrowers become involuntarily unemployed or disabled. Mentioning this benefit could also help sellers when marketing their home.

Mrs. Marshall says some loan programs allow sellers to split the payment of transfer taxes with the home buyers in addition to paying other closing costs.

Occasionally, a homeowner may have a VA or FHA government-backed loan that is assumable and can be transferred to the buyer so that the buyer does not have to obtain their own loan. Mr. Klein says there are very few such loans in existence these days, so this is rarely an option for a seller to offer.

Sellers should check with their lender if they are not certain whether they can pass their loan on to a buyer.

Seller financing is another option that may be available to some sellers who are comfortable loaning the money directly to a buyer.

“For instance, someone may own a home worth $500,000 free and clear and is willing to sell it to a buyer with a substantial down payment,” Mr. Klein says. “The seller could then give the buyer a loan for $350,000 secured against the property. There may be an opportunity for some sellers to provide that kind of financing, especially if the seller had less stringent qualifications than the typical lender.”

Mr. Klein also suggests that more sellers might be willing to finance a second mortgage of 10 to 20 percent of the value of the home, particularly since second mortgages are more difficult to obtain in the current credit market.

“Lenders are less willing to qualify buyers for a second loan when the consensus is that home prices are going down,” Mr. Klein says. “It used to be popular to finance a home with an 80 percent first loan and a 10 or 15 percent second loan, plus a down payment.

“Now lenders prefer that borrowers have at least 10 to 20 percent for a down payment,” he says. “Sellers might be more willing to offer to personally finance that second trust than to finance the entire home purchase.”

Financing the sale of their own home requires sellers to have plenty of equity in their home or additional assets that make them willing to assume the risk of extending credit to a buyer. Sellers should work with an attorney to be sure the contract for the loan gives them enough protection.

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