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I'm buying a condo and getting a closing credit. How will that affect my mortgage?

Depending on the size of the closing credit, you could end up with a smaller down payment and mortgage. 

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Question:

I want to buy a condo in a new development, and the developer is offering a $150,000 closing credit, which effectively lowers the amount I'll have to spend. How will this affect getting a mortgage on the condo? What is the actual sales price the bank will use?

Answer:

Often, a closing credit means that the developer will cover your closing costs, but occasionally they might lower the sales price of the condo instead, our experts say.

Closing credits—money the seller pays the buyer upon closing—are on the rise in NYC, thanks to a slowing of the real estate market and an oversupply of luxury condos. It's great news for buyers like you, though you may not be so lucky as to get a lower sales price, and therefore a smaller mortgage. 

"Most often, the developer will take care of buyer closing costs separately and roll that amount into the sales price, thereby keeping the official sales price higher," says Deanna Kory, a broker with Corcoran. "In this way it helps to keep the sales price as high as possible, which is generally preferable to most developers." 

However, in some cases, the closing credit could be applied to the sales price of the condo. Given the size of the credit you've been offered, it's possible you may end up with a lower sales price, and therefore a smaller down payment and mortgage. 

"In the event the developer offers a high closing credit and it exceeds the secondary market guidelines for an interested party contribution, a lender will look to adjust the sales by the closing credit," explains Brittney Baldwin, vice president of National Cooperative Bank (a Brick sponsor.) "For example, if the property sells for $1,000,000 [minus the closing credit], then you would base your new sales price and down payment on the remaining $900,000." (Note that NCB does not provide loans for buyers of condos in new developments unless they are 50 percent sold.)

Your sales contract should specify exactly how the closing credits will affect the transaction. Keep in mind that the savings you gain from a closing credit could come with some consequences. 

"One such consequence is the likelihood that the transfer taxes will need to be calculated at the original purchase price," says Jeffrey Reich, partner at Schwartz Sladkus Reich Greenberg Atlas. "Thus, if the purchaser is obligated to pay the transfer taxes, which is usually the case when buying from a developer, taking a credit in lieu of a price reduction will cost the purchaser more in transfer tax liability."


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