You’ll notice that there are many people involved in the homebuying process, and the people who have a financial stake of interest in the property or the transaction occurring (like the seller or the real estate agents) are called “interested parties”. These interested parties can contribute funds known as Interested Party Contributions (IPCs) that can help pay for closing costs, whether those closing costs are property taxes, property insurance, repairs, or any number of other closing costs.
IPCs appear as closing cost credits and are shown on the final closing disclosure the buyer receives. IPCs are fantastic at reducing the money you need to pay at closing and can be a huge benefit to buyers in today’s market. The one downside to be careful of is when you receive too many IPCs, you run the risk of increasing your loan to property value ratio (LTV) beyond the allowable amount, which can then force you to incur further costs like mortgage insurance premiums.
Don’t worry, LendFriend is here to help walk you through how to make the most of your IPCs. Let’s take a look at how you can maximize the benefits of IPCs and eliminate the downside.
Here’s the lay of the LTV land:
Most underwriting guidelines have a limit on the maximum IPCs a buyer can use. The maximum IPC permitted will always be a percentage of the lesser of the purchase price or closing costs. If the home being purchased is a primary residence or second home/vacation home, the maximum amount of IPCs will depend on the LTV. If the home being purchased is an investment property, the maximum amount of IPCs is the lesser of 2% of the purchase price or the closing costs. Below is a helpful chart laying out all of your options.
|
Occupancy Type |
LTV Ratio |
Maximum IPC |
|
Primary Residence or Second Home/Vacation Home |
Greater than 90% |
3% |
|
75.01%-90% |
6% |
|
|
75% or less |
9% |
|
|
Investment Property |
N/A |
2% |
What happens when you exceed the maximum amount of IPCs?
If your IPCs exceed the maximum amount of IPCs allowed by underwriting guidelines, the lender is required to count the excess amount as a reduction of the purchase price, which might sound great, but, in reality, can be detrimental to your LTV.
It’s important to keep in mind that if you are obtaining a conventional mortgage loan, you want your LTV to be 80% or less in order to avoid having to pay for mortgage insurance. Having to pay for mortgage insurance just because you received too many credits would be a waste of money that we’d love for you to avoid!
So, before agreeing to IPCs, check in with your lender and make sure your IPCs don’t affect your loan payments.
Examples of how IPCs can affect your LTV
Here are a couple examples to show you the application of IPCs at your closing.
Example 1 (LTV below the 80% threshold):
A $400,000 Purchase of a primary residence with a $240,000 Loan means a Loan-to-Value Ratio (LTV) of 60% (240,000/400,000).
Looking at the chart above, the maximum IPC permitted by the lender before counting against the purchase price is 9% of the lesser of the purchase price or closing costs or $36,000.
If the IPC on the transaction is $40,000, the credit would exceed the IPC limit. The extra $4,000 would be a sales concession (or reduction of the purchase price). The lender would consider the purchase price to be $396,000 ($400,000-$4,000) and the resulting LTV would be 60.61%, still well below the 80% threshold.
Example 2 (LTV at the 80% threshold):
A $400,000 Purchase with a $320,000 Loan would be a Loan to Value Ratio (LTV) of 80% (320,000/400,000).
The maximum IPC on a 80% LTV is 6% of the lesser of the purchase price or closing costs or $24,000.
If that same $40,000 credit from example 1 was offered, the $24,000 cap would leave $16,000 of excess IPCs. The lender would consider the purchase price to be $384,000 ($400,000-$16,000) and the resulting LTV would be 83.33%, which would cause the buyer to have to pay mortgage insurance.
LendFriend is here to help!
IPCs are one of a buyer’s best tools and we don’t want you to think otherwise. Who wouldn't want to use other people's money to buy their home?! However, it’s important to make sure you adjust your loan terms accordingly when necessary, so you don’t get stuck paying for avoidable costs. If you have questions on how to make the most of your IPCs, give us a call at 512.881.5099 or apply now, and one of our loan officers will be in touch as soon as we receive the application.
