I received this email from one of our subscribers:
”…with a VA mortgage, can you finance buyer closing costs in excess of the purchase price (e.g. not ask for seller financing contributions, but just borrow them in excess of the purchase price)”
With a VA mortgage, the buyers closing cost cannot be financed, with exception to the VA funding fee, regardless of the appraised value.
The VA loan amount is limited to the purchase price, appraised value or VA county loan limit (or VA jumbo loan amount)*, whichever is less.
*NOTE: VA does not set actual loan limits on counties. They do set a limit as to their maximum guarantee (meaning zero down financing). In the greater Seattle/King-County area, the loan limit for zero down financing is currently $500,000. Click here for a complete list of VA loan amounts per county. VA loan amounts exceeding $500,000 in the Seattle/King County area are considered VA Jumbos and will require some down payment depending on the difference between the sales price and county loan limit.
USDA loans, on the other hand, will allow for buyers closing cost to be financed IF the appraised value is higher than the sales price. The loan amount is limited to the appraised value and must be applied to bona fide closing cost.
USDA loans are also zero down programs and are only eligible in specific designated rural areas, like Snoqualmie, Carnation or Duvall, and to borrowers who meet certain household income limits.
Sellers can contribute towards closing cost for both of these mortgage programs and currently, low mortgage rates are often paired with enough rebate pricing to cover a majority of the closing cost.
Thanks for your question!
Agents (and buyers) need to know that if they are going to do this (fund such items in the loan) it needs to be disclosed to the seller, because the seller needs to know that the property will need to appraise for more than the sales price. That affects the seller.
Consult your broker.
I NEVER advise USDA buyers to count on the home appraising for higher than the sales price… that’s too much of a gamble. If a buyer is not wanting to bring in funds for closing and the seller is not contributing towards the closing cost, the buyer should talk to their mortgage professional about using rebate pricing to help with closing cost.
If the home happens to appraise for more than the sales price, and the buyer is using USDA for financing – it’s only a “bonus” IF they want to finance closing cost.
I would agree, if for no other reason than so many appraisals come in at exactly the sales price.
Paragraph a of the state-wide purchase and sale agreement has a representation that the buyer has funds to close. The financing addendum addresses the situation where the appraisal is less than the sales price, but not where the appraisal is less than the sales price plus some closing costs. Without some tweaking and/or disclosure the buyer would likely be in breach if the appraisal came in “low” and the financing addendum would not save them.