Reprinted Articles

It is quite common for real estate industry professionals and buyers or sellers to be concerned about how much the seller is allowed to pay in contributions on a conventional mortgage loan in Georgia. All closing costs that are normally paid by the borrower are considered contributions if they are paid the seller, builder, developer, real estate agent or any other interested party to the transaction, including any affiliates, may pay these contributions.

The maximum allowable contributions are calculated on: the purchase price or appraised value (which ever is less), property type and the down payment.

Primary residences and second homes with less than 10% down allow contributions of 3%. If the buyer pays between 10 and 25% down the contributions are limited to 6%. Down payments of more than 25% allows contributions up to 9% on conforming loan amounts but non-conforming loans are limited to 6%. The maximum contribution is 6% for conforming 80/20 and 90/10 on primary residence and second home financing.

Contributions on investment property are limited to 2% regardless of amount paid down.

Money paid toward any of the following are included in the maximum allowable limits:

1. Buyer Closing Costs

2. Discount points

3. Commitment fees

4. Origination Fees

5. Mortgage insurance premium

6. Discount Points that temporarily or permanently lower the borrowers monthly payment or interest rate.

7. Any other transfer fees normally paid by the borrower, e.g., transfer taxes, tax stamps, title insurance, surveys, appraisal, and recording and attorney fees.

8. Homeowner association fees for future monthly dues.

If there are excess contributions, a downward adjustment to the property’s sales price must be made to reflect the amount of any contributions that exceed the maximum contribution limits. The LTV/TLTV ratio must then be calculated based upon the lesser of the reduced sales price or the appraised value.

The estimated value of any personal property, e.g., furniture, decorator items, automobiles or other “giveaways”, must always be deducted from the property’s sales price regardless of the amount of any other concessions.

A cash credit, cash rebate, incentive or inducement/enticement to purchase from the seller, builder, or developer must also always be deducted from the property’s sales price. Examples may include but are not limited to: excessive marketing costs, commissions, or seller financing at below market interest rates.

A new LTV/TLTV must be calculated whenever the property’s sales price is reduced. The LTV/TLTV is based on the lesser of the adjusted sales price or the appraised value.

Typically, a short list of personal property may come with a house. Most built-in appliances (such as stove, refrigerator, dishwasher), window coverings and carpeting, are usually considered to be fixtures so no adjustment to the purchase price is needed.

Keep this in mind. It is common for some personal property to be left for convenience and it normally has minimal value (e.g., pool cleaning equipment, lawn mowers, picnic tables and patio sets). So, if this personal property equals less than 2% of the value of the property or has a value of less than $500 it is not considered a contribution.

All things considered, a lack of training on our part can cause major issues for the buyer or seller. You can see how important it is that Loan Professionals and Real Estate Agents understand the terms of concessions. Sales contracts and mortgage loans should be structured accordingly.

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