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For California FHA loans, sellers can pay up to 6% of the purchase price towards the borrower’s closing costs.

An FHA lender or broker can use some of those monies for a permanent interest rate buydown. There are no differences between Los Angeles County, San Bernardino County…Claremont, Pomona, Glendora, Fontana…the 6% applies everywhere for California FHA loans.

It works like this: If your closing costs are actually 4% of the price, but you negotiate 6% out of the seller, you have 2% of the purchase price left to spend on discount points towards the rate.

In the mortgage interest rate world, contrary to popular belief, rates do not change, only the daily market price of a particular rate changes. Day to day, there is no set rule on what the price difference between a 5.5% rate and 5% rate will be, but a trained loan professional knows how to read the daily pricings.

If on the day of your rate lock there is a 1to 2 point extra cost to buy a 5% rate, that is a borrower’s prerogative…to “buy” that discounted rate. With an FHA loan and closing cost money from the seller, use their money, not yours, to get a permanent lower rate and monthly payment. It’s not difficult to understand why.

This process may make you pay a little more for the house, but here’s the math:

• $250,000 price, but the seller says no to 6% closing costs, they will only give you 3%. That means you will need to bring in $2500 of your own money for closing costs if they were 4%. Payments would be $1393 at 5.5%.

• You want another $7500 from the seller in order to get to 6%. Offer the seller more than $7500…maybe $10,000 more. Why would you do this? The monthly payments to you go up only $56. However, now you do not have to bring in $2500 of your own money (it would take 44 months to recover that $2500 at $56 a month), AND your new rate will be 5% (or maybe even lower) instead of 5.5%. Your payments now drop to $1370. You have now paid $10,000 more for the house, but you just saved $2500 of your cash and your monthly payments went DOWN $23.

The math doesn’t lie! Lowballing offers is a bad way to pay less for your house!

FAQ

Q:  I heard banks won’t pay closing costs on foreclosures or short-sales.

A:  False…every deal is it’s own negotiation. We just got $15,600 (full 6%) on a foreclosure from Ocwen Bank last week.

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Q:  What if my agent says they are uncomfortable doing this?

A:  You may have an agent who does not fully understand FHA rules.  There is great flexibility in making an FHA deal work.  If they still don’t want to use this strategy, we should get a very clear explanation from your agent as to why they think it won’t work. You won’t always get what you ask for, but you have to ask. If the property will appraise at the sales price value, no seller will pass up making more on the house than what they agreed to on the first offer.

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Q:  If I’m only approved at $250,000, how can I pay more?

A:  With a properly structured deal your monthly payments go down and your cash out of pocket goes down. You’re actually an easier approval at the higher price!!