What a seller assist at closing really cover

Question: In an effort to sell my house, I agreed to pay up to $8,000 of the buyer's closing costs. Is there anything I can do to keep the amount as far below $8,000 as possible?

Answer: If you agreed to pay "up to" $8,000 of the buyer's costs, you will almost surely pay that or very close to it. If a buyer is astute, any part of the $8,000 not needed to pay the lender's fixed-dollar fees or third-party fees will be used to pay points that reduce the borrower's interest rate. This is called "buying down the rate."

Points are lender fees expressed as a percent of the loan balance, and lenders trade off points against the interest rate. Low rates require high points, and high rates command negative points called rebates. Points are settlement costs and are covered by the seller's commitment.

If a borrower is not aware of the option to buy down the rate, the excess very likely will end up in the pocket of the loan officer or mortgage broker.

Seller assists arose from the effort to qualify prospective buyers who lack enough cash. A potential seller looking to net $300,000 for a house may broaden the market by pricing it at $308,000 with an offer to pay up to $8,000 in settlement costs. This permits a larger loan and requires less cash from the cash-short buyer than paying $300,000 without it.

For example, assume the borrower is putting 10 percent down and settlement costs are $8,000. If the price is $300,000, the buyer needs cash equal to 10 percent of $300,000, or $30,000, plus $8,000 in costs. When the price is $308,000 with no costs, the buyer needs only 10 percent of $308,000, or $30,800.

A major proviso: The property's appraised value must match the price inclusive of settlement costs. Also, the seller's contribution must fall within the lender's guidelines. Fannie Mae and Freddie Mac set a limit of 3 percent of the price when the down payment is 10 percent.

Jack Guttentag is professor emeritus of finance at the Wharton School. http://www.mtgprofessor.com.