• In order to maintain a certain price point, many sellers of new properties will offer “incentives” to purchasers in lieu of a reduction in the price. The most common one is to include a “decorating allowance”. I have seen “decorating allowances” as high as $100,000 but they can be of any amount. This basically means that the purchaser would get this amount back as a “credit” upon completion. Normally this is done at the lawyer/notary’s office in the statement of adjustments.

    Decorating allowances can pose a problem when obtaining financing!

    This past week a client I had approved called me from the lawyer’s office saying that a problem had come up. Up to that point I was sure we had taken care of everything and I tracked the process to ensure everything went smoothly. “So what could be up?” I thought. It turns out that I was not told about a “decorating allowance” that was involved in the purchase. When the lender found out, they reduced the mortgage amount accordingly. The client was now short of money.

    This is a typical application by lenders when incentives like these are involved. Most lenders will reduce the purchase price by the value of the “decorating allowance” and lend based on the lower value.

    In the case of this client I was never told about the incentive thus could not make the necessary arrangements nor provide the proper advice in respects to it. How did the lender find out? Well, the lawyer/notary involved is required by the lender to disclose to the lender any “unusual” credits being provided to the client. Typical instructions from the lender will have this requirement. This is how the lender found out in respects to my client.

    Luckily I was able to resolve the situation for my client in time for the closing as the amount involved was not huge. If it was a “$100,000 decorating allowance” it would have been…well, I just don’t want to think about it even.

    So, always disclose all information in respects to your purchase to the person arranging the financing. Decorating allowances may sound nice but can be a problem if not disclosed.

Leave a reply

Cancel reply