Youâ€™ve seen the real estate shows that dramatize the buying of a home and the star TV Realtor says â€œhey, letâ€™s offer this price and have them pay you a $5,000 closing cost bonusâ€. Or, the real estate listing that offers a â€œdecorating bonus of $3,500â€. In both examples, the vendor (seller) is offering additional money as an incentive to buy their home.
While at first, the bonuses and offers seem great, you should know that unless you are paying cash for the house (ie: not getting a mortgage for the purchase), they are worth nothing in the end.
Letâ€™s use the following example of a purchase price of $300,000 with a â€œdecorating bonusâ€ of $5,000. The seller accepts your offer and written into the purchase and sale agreement is the bonus of $5,000. When you get a mortgage, your lender also gets a copy of your agreement. When the lender reviews it, they will adjust your purchase price to $295,000. The reason for the adjustment makes sense when you are actually paying a net price of $295,000 for the property ($300,000 minus the value of the bonus of $5,000 = $295,000). The lender cannot use a purchase price of $300,000 since you are not paying the full $300,000 for the house after receiving the bonus from the seller.
Many buyers are surprised when this happens and are not often told of this by their Realtor, and unless explained by their lender or Mortgage Broker, will have a big surprise on closing when they must come up with an additional $5,000 out of their own pocket (since the lender has reduced the value of the property) then will receive the money back from the vender on closing, thus making it a net zero gain.
When paying cash, the above example doesnâ€™t apply as there is no mortgage lender involved and you would pay $300,000 for the house and receive $5,000 on closing. Whether you were arranging a mortgage or not, the net outlay of cash is $295,000. The only difference with a mortgage is that you must pay the difference on closing up front to get the bonus.
It should also be noted, that with purchases of homes that include items of value that wouldnâ€™t normally be included with a home such as a boat, large riding lawn mower, or even furniture, your lender can request that the purchase price of the home be reduced by the value of the item (since lenders wonâ€™t mortgage boats or furniture).
So, the next time you hear â€œclosing cost bonusâ€, â€œdecorating bonusâ€, â€œearly closing incentiveâ€, be aware that if you are mortgaging the property, your initial down payment will be increased by the amount of the bonus. My advice: just make the purchase price what you want to pay for the property. Donâ€™t make it complicated with closing bonuses.
Itâ€™s always best to talk to a dedicated Dominion Lending Centres Mortgage Professional in your area.
Dominion Lending Centres – Accredited Mortgage Professional
Sean is part of DLC Key Mortgage Partners based in Kingston, ON.