0
0
Today we are going to discuss the confusion surrounding the application of real estate tax credits to the borrower’s closing costs and (MRI) minimum required investment, when applicable. If you are just as confused, this blog is for you.
In some state’s property taxes are paid in the arrears which means that the borrower is paying for “services” the municipality has already provided. So, charges for 2018 are not billed until 2019. In this instance, the seller pays the buyer for the portion of the charges accrued before the buyer purchased the property.
Since the guidance on this topic can be quite confusing, I wanted to try and better explain the application of real estate tax credits and, more specifically, how they relate to the minimum required investment.
When real estate taxes are paid in the arrears, the seller’s real estate tax credit may be used for the borrower paid closing costs as well as satisfying the Borrower’s MRI. That is if the borrower can document that they had sufficient assets from allowable sources at the time of underwriting.
(Note: Please refer to investor specific guidelines for allowable sources.)
This permits the Borrower to bring a portion of their closing costs and/or MRI to the closing and combine that portion with the real estate tax credit for their total closing costs and/or MRI.
For example, on a $100,000 home purchase, an FHA mortgage loan borrower needs to show 3.5% of the $100,000 purchase price or $3,500 to satisfy the Minimum Required Investment, in eligible assets.
If the Borrower has documented the $3,500, from allowable sources, the borrower does not have to bring that $3,500 or any portion thereof to closing – if the closing costs and/or MRI are offset by any real estate tax credits paid by the seller in the arrears.
If the borrower has a $2,000 real estate tax credit the borrower would get a credit in the amount of $2,000 from the seller so the borrower only needs to bring $1,500 to closing.
It is very important to remember the distinction between “verified for purposes of underwriting” where the borrower has already verified, per investor guidelines, that they have the entire $3,500 and what is “actually required to bring to closing.” If the Borrower brought the entire $3,500 to closing, to show on the settlement statement, the Borrower would then be getting a refund in the amount of the real estate tax credit of $2,000.
Again, always refer to investor specific guidelines as it is always better to safe than sorry.
