BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Agent Credit to Buyer – Avoiding Problems
Q: I am a buyer agent and during the escrow I agreed to credit my buyer $5,000 toward closing costs. My buyer is buying with a low down payment and is tight on cash. After inspections, the buyer asked the seller for credits for some repairs discovered by the home inspector. The seller only agreed to a portion of the cost, so I agreed to the $5,000 credit to my buyer to help her complete the sale. I agreed to that credit in an email to my buyer, which we disclosed to the seller and to buyer’s lender. After all contingencies were removed, the buyer’s lender stated, and confirmed in their escrow instructions, that they would only allow a $3,000 credit to buyer because that was the only amount of closing costs that they would allow to be credited. After closing, the buyer is demanding the balance of $2,000. My broker tells me that we cannot pay this amount to the buyer because it will violate the escrow instructions of buyer’s lender and could be considered to be lender fraud. My buyer is upset and threatening to sue. Help.
A: Your situation is not at all that uncommon. And your broker is correct that paying this amount to buyer outside of escrow could be lender fraud. Oftentimes, a buyer’s lender will limit the amount that can be credited to the buyer, either because that is the maximum of actual non-recurring closing costs, or because any additional payments to buyer effectively reduces buyer’s down payment amount on which the loan was underwritten. Essentially, the bank may feel, the buyer has less “skin in the game.”
This problem can be avoided by making clear that your agreement to credit buyer a portion of your commission has specific limitations. By using the words “up to” $5,000, you are making it clear that the $5,000 is the upper limit, not the actual fixed amount. Second, state that the credit is toward “non-recurring closing costs”, since this is a determinable amount. If you just say the credit is toward “closing costs” in general, that could include a wide range of costs that a buyer may try to characterize as closing costs. Finally, make the payment subject to the approval of the buyer’s lender.
For example, you should state something like:
“I agree that I will credit you up to $5,000 toward those non-recurring closing costs which are approved by your lender.”
NOTE: This language can also be used in situations where your seller is agreeing to give credits to a buyer.
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© Copyright Broker Risk Management 2013 4/19/13