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## What are Bad Boy Carve Outs?

 

**Bad Boy Carve Outs** are provisions in [non-recourse](https://www.offermarket.us/real-estate-glossary/non-recourse) [DSCR loans](https://www.offermarket.us/blog/dscr-loan-program) that protect the lender in the event members of the borrowing entity conduct themselves in an illegal or fraudulent manner. Bad boy carveouts allow the lender to hold one or more individuals of the borrowing entity personally liable for repayment of the loan.

 

## Examples that trigger Bad Boy Carveouts

 

Bad Boy Carve Outs can be triggered by several different violations of loan covenants, so it is important to read your loan docs carefully and consult your real estate attorney.

 

Examples include:

 

- taking on subordinate (i.e. 2nd position) financing without express written consent from the 1st position lender
- forged or fraudulent tax returns, bank statements, financial statements, operating documents (i.e. rent roll)
- illegal business conduct at the subject property 

 

## Non-Recourse DSCR Loans

 

Non-Recourse [DSCR Loans](https://www.offermarket.us/dscr-loan) are cash-flow based loans where personal guarantee is not required.

 

## Bad Boy Guaranty

 

Bad Boy Guaranties or Bad Boy Guarantees are the same concept as Bad Boy Carveouts.

 

## Are Bad Boy Carevouts Required?

 

Removing bad boy carveouts from your loan is unlikely and may depend on several factors:

 

- **securitization program guidelines and requirements**: if the lender will be selling the loan to an investor that will be securitizing the loan as part of a mortgage-backed security, then it is unlikely you would be able to remove the bad boy carve out.
- **quality of collateral**: if the collateral (subject property) is of high quality, the lender may be willing to accept the removal of a bad boy carveout, knowing that they will have an easier time recouping their loan through [foreclosure](https://www.offermarket.us/real-estate-glossary/foreclosure) or [pledge of shares](https://www.offermarket.us/real-estate-glossary/pledge-of-shares). 
- **pledge of equity**: if the lender's [pledge of shares agreement](https://www.offermarket.us/real-estate-glossary/pledge-of-shares) is signed by the borrower, the lender may be willing to remove a bad boy carve out.
- **LTV capitalization**: if the loan to value is conservative (i.e. 65% instead of 80%), then the lender may be willing to remove the bad boy provision from the loan agreement because the property is worth considerably more than the loan, and liquidation through foreclosure or pledge of shares should adequately allow the lender to recoup their loan principal and any fees.

Bad Boy Carve Outs protect lenders in non-recourse DSCR loans if the borrower engages in illegal or fraudulent activities during the loan process.

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Bad Boy Carve Outs | OfferMarket Real Estate Glossary

Bad Boy Carve Outs

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## What does non-recourse mean?

 

**Non-recourse** refers to a type of loan agreement where the lender can only look to the collateral pledged as security for the loan in case of default, and not to the borrower personally, for recovery of the debt. This means that in the event of default, the lender cannot seek payment or recovery from the borrower's personal assets or income.

 

## Non-recourse loan interest rates

 

Non-recourse loans are typically priced at a higher interest rate than recourse loans in order to compensate the lender for accepting less security of principal. Lenders may also require a higher [DSCR](https://www.offermarket.us/dscr-loan) in order to qualify for a given loan-to-value or LTV.

 

## Are DSCR loans non-recourse?

 

Not all DSCR loans are non-recourse. In fact, most private lenders require or strongly prefer full recourse. Loan programs that are non-recourse commonly include a [pledge of shares agreement](https://www.offermarket.us/real-estate-glossary/pledge-of-shares) and [bad boy carve outs](https://www.offermarket.us/real-estate-glossary/bad-boy-carve-outs).

 

### 1 - 4 Unit DSCR Loans

 

Most [DSCR loan programs](https://www.offermarket.us/blog/dscr-loan-no-down-payment) for 1-4 units require full recourse. This means that at least one member of the borrowing entity, typically an LLC, serves as a personal guarantor for the life of the loan.

 

### Portfolio DSCR Loans

 

Portfolio DSCR loans of 2 or more 1-4 unit properties can be either full recourse or non-recourse. 

 

### Multifamily DSCR Loans

 

Likewise, multifamily DSCR loans for 5+ unit properties can be either full recourse or non-recourse.

 

Ultimately, whether a loan is recourse or non-recourse depends on the type of loan and the risk tolerance of the lender and borrower.

 

The terms of the loan agreement will determine whether a DSCR loan is recourse or non-recourse, and the decision will depend on various factors, including the creditworthiness of the borrower, the type of collateral pledged as security, and the lender's risk tolerance.

 

## What's the difference between recourse and non-recourse loans?

 

A recourse loan is a type of loan or financing agreement where the borrower is personally liable for repayment of the debt, and the lender has the right to seek repayment from the borrower's personal assets or income in the event of default. This means that [the lender](https://www.offermarket.us/blog/best-dscr-lenders) has a claim not only on the collateral pledged as security for the loan, but also on the borrower personally.

 

A non-recourse loan, on the other hand, is a type of loan where the borrower is not personally liable for repayment of the debt in the event of default. The lender's only remedy in the event of default is to foreclose on, or seize, the collateral pledged as security for the loan, and not to seek repayment from the borrower personally.

 

In general, non-recourse loans are considered to be less risky for the borrower, but they also typically come with stricter terms and higher interest rates to compensate the lender for the increased risk.

 

## Are fix and flip loans non-recourse?

 

While it depends on the lender, most fix and flip loans are recourse and therefore require a personal guarantor.

 

## Why do lenders require personal guarantee?

 

Lenders require a [personal guarantee](https://www.offermarket.us/blog/hard-money-lender#:~:text=Personal%20Guarantees.%20Private,hard%20money%20loan.) from borrowers as a way to secure their investment in case of default on a loan. A personal guarantee is a commitment from the borrower to repay the debt using their personal assets or income if the borrower's business is unable to repay the loan.

 

Lenders ask for personal guarantees because it provides them with added protection and security in the event that the borrower's business is unable to repay the loan. This helps the lender to recover their investment even if the borrower's business fails or goes bankrupt. Personal guarantees also give lenders a way to enforce repayment if the collateral pledged as security for the loan is not sufficient to cover the debt.

 

In general, lenders require personal guarantees when the borrower has a limited credit history or when the loan amount is large and the collateral is inadequate to secure the debt.

Non-recourse lending means there is no personal guarantee required, protecting your assets.

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Non-Recourse | OfferMarket Real Estate Glossary

Non-Recourse

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Private Lending

Understanding Closing Costs

Components of Closing Costs

Methods to Calculate Closing Costs

Strategies to Minimize Closing Costs

Conclusion

Frequently Asked Questions

Grow your real estate portfolio with OfferMarket

**Last updated:** March 31, 2025

Buying a home is exciting, but understanding the financial side can be overwhelming. [Calculating your closing costs](https://www.offermarket.us/blog/closing-cost-calculator) is a crucial step that ensures you’re prepared for all the expenses involved. Knowing what to expect can help you avoid surprises on closing day.

From lender fees to taxes and insurance, closing costs add up quickly. By breaking down each component, you can get a clear picture of the total amount you’ll need. This guide will walk you through the essential steps to accurately calculate your closing costs, empowering you to make informed decisions and confidently move into your new home.

## **Understanding Closing Costs**

Closing costs are fees associated with finalizing your home purchase. They encompass various charges beyond the property's sale price.

 

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### **What Are Closing Costs?**

Closing costs include expenses related to your [home purchase](https://www.offermarket.us/blog/how-to-buy-a-house) beyond the purchase price. These fees typically range from 2% to 5% of the home's price for buyers and 8% to 10% for sellers.

For example, on a $400,000 home, buyer closing costs range from $8,000 to $20,000.

#### **Common closing costs for buyers include:**

* Loan origination fees 
* Appraisal fee
* Home inspection fee
* Title insurance (lender’s policy 
* Attorney fees
* Homeowner’s insurance and prepaid costs
* Recording fees

#### **Sellers usually cover:**

* Transfer taxes
* Title insurance (owner’s policy
* Escrow fees
* Real estate brokerage fees (commissions

#### **Factors affecting closing costs:**

* **Loan type:** FHA, VA, conventional loans have different fees 
* **Location:** Taxes and recording fees vary by state or county 
* **Home price:** Higher prices result in higher closing costs 
* **Service providers:** Costs for appraisers and inspectors can vary 
* **Discount points:** Paying points can lower your interest rate

### **Importance of Calculating Closing Costs**

Calculating [closing costs](https://www.offermarket.us/blog/cc) ensures you budget accurately for your home purchase. It prevents unexpected expenses at closing, facilitating a smoother transaction.

* **Plan your finances:** Allocate funds for necessary fees 
* **Negotiate effectively:** Identify negotiable fees to potentially reduce costs 
* **Compare loan offers:** Assess differing closing costs among lenders 
* **Avoid delays:** Prepare required payments in advance for closing day

## **Components of Closing Costs**

Understanding the components of closing costs helps you prepare financially for your home purchase. Each component contributes to the total expenses you’ll incur at closing.

### **Loan Fees**

Loan fees include all charges related to obtaining your [mortgage](https://www.offermarket.us/blog/private-mortgages). These typically consist of:

* **Loan Origination Fees:** Costs for processing your loan application, usually 0.5% to 1% of the loan amount. 
* **Appraisal Fees:** Charges for evaluating the property’s value, ranging from $300 to $700. 
* **Credit Report Fees:** Fees for accessing your credit history, generally around $30 to $50. 
* **Underwriting Fees:** Costs for evaluating your loan application, typically $400 to $600. 
* **Discount Points:** Optional fees paid to lower your interest rate, usually $100 per point.

### **Title and Escrow Fees**

Title and escrow fees ensure the property’s title is clear and handle the transaction process. These fees include:

* **Title Insurance:** Protects against title defects, costing approximately 0.5% of the purchase price. 
* **Escrow Fees:** Charges for managing the escrow account, averaging $500 to $2,000. 
* **Title Search Fees:** Fees for researching property records, typically $200 to $400. 
* **Recording Fees:** Costs to register the property transfer with the local government, usually $50 to $150. 
* **Attorney Fees:** Legal costs for reviewing documents, ranging from $500 to $1,500.

### **Prepaid Expenses**

Prepaid expenses cover costs that must be paid in advance before you receive the loan. These include:

* **Homeowner’s Insurance:** Prepaid premiums to protect your property, generally $1,000 to $2,000 annually. 
* **Property Taxes:** Advance payment of taxes, varying by location and property value. 
* **Mortgage Interest:** Interest for the period between closing and your first payment, based on the loan amount and interest rate. 
* **Prepaid Homeowner Association (HOA) Fees:** Upfront fees for properties within an [HOA](https://www.offermarket.us/blog/hoa-meaning), typically $200 to $500. 
* **Private Mortgage Insurance (PMI):** If applicable, premiums paid upfront to protect the lender, usually 0.5% to 1% of the loan amount.

By breaking down these components, you can accurately estimate your closing costs and budget accordingly.

## **Methods to Calculate Closing Costs**

### **Using Online Calculators**

Online calculators offer a quick way to estimate your closing costs. Enter your home's purchase price, loan amount, and location to receive an estimate. These tools typically factor in lender fees, taxes, and insurance. For example, on a $400,000 home, an online calculator might estimate closing costs between $8,000 and $20,000. Ensure the calculator includes all relevant fees for accuracy.

### **Consulting with Your Lender**

[Your lender](https://www.offermarket.us/blog/private-lender) provides a precise closing cost estimate through a Loan Estimate form. This document outlines all fees associated with your mortgage, including loan origination, appraisal, and underwriting fees. Schedule a meeting with your lender to review these details. They can explain each charge and answer your questions, ensuring you understand the total costs involved.

## **Strategies to Minimize Closing Costs**

Reducing closing costs can save you thousands when purchasing a home. Implement these strategies to keep your expenses low.

### **Negotiating Fees**

Negotiate with your lender to lower loan origination fees or request a fee waiver. Ask for discounts on appraisal and underwriting fees. Discuss the possibility of reducing title insurance premiums by comparing offers. Inquire if your lender can cover certain costs as part of the loan package. Request seller concessions to have the seller pay a portion of your closing costs. By actively negotiating, you can significantly decrease the total amount you need to pay at closing.

### **Comparing Service Providers**

Compare quotes from multiple lenders to find the best [loan terms](https://www.offermarket.us/blog/dscr-loan-terms) and lowest fees. Shop around for title insurance providers to ensure competitive rates. Obtain estimates from different home inspectors to balance cost and quality. Evaluate offers from various escrow companies to secure the most favorable fees. By researching and selecting the most cost-effective service providers, you can minimize your overall closing expenses.

## **Conclusion**

Navigating closing costs doesn't have to be daunting. By understanding each component and using the right tools, you can confidently estimate what you'll need. Take the time to budget accurately and explore ways to reduce expenses. Being prepared ensures a smoother home-buying experience. You're now equipped to handle closing costs effectively and move into your new home with peace of mind.

## **Frequently Asked Questions**

### **What are closing costs?**

Closing costs are fees associated with finalizing the purchase of a home. They typically range from 2% to 5% of the home's purchase price for buyers and 8% to 10% for sellers. These costs include lender fees, appraisal fees, title insurance, escrow fees, and more. Understanding closing costs helps buyers and sellers prepare financially and avoid unexpected expenses on closing day.

### **How much are closing costs when buying a home?**

Closing costs for buyers generally range from 2% to 5% of the home's price. For example, on a $400,000 home, closing costs can be between $8,000 and $20,000. The exact amount depends on factors like the loan type, location, and specific fees charged by service providers. It's essential to budget for these costs early in the home-buying process to ensure a smooth transaction.

### **What factors affect closing costs?**

Several factors influence closing costs, including the type of loan, the home's location, purchase price, and fees from service providers. Additionally, optional costs like discount points to lower interest rates can impact the total. Understanding these factors helps buyers and sellers estimate their expenses accurately and negotiate better terms during the home-buying process.

### **What are the common closing costs for buyers?**

Common closing costs for buyers include loan origination fees, appraisal fees, home inspection fees, title insurance, attorney fees, and homeowner’s insurance. These fees cover the costs of obtaining a mortgage, ensuring the property’s title is clear, and protecting the home against future claims. Being aware of these costs helps buyers prepare financially and avoid last-minute surprises.

### **What are the common closing costs for sellers?**

Sellers typically cover transfer taxes, title insurance, escrow fees, and real estate brokerage fees. These costs are associated with transferring ownership of the property and ensuring all legal and financial obligations are met. Understanding these expenses helps sellers budget appropriately and negotiate effectively during the sale process.

### **How can I calculate closing costs?**

You can calculate closing costs using online calculators or by consulting with lenders. Online calculators provide quick estimates based on the home's price, loan amount, and location. Lenders offer more precise estimates through a Loan Estimate form, detailing all associated fees. Accurate calculation helps you budget effectively and prepare for the financial requirements of purchasing a home.

### **How can I minimize closing costs?**

To minimize closing costs, consider negotiating fees with your lender, comparing rates from different service providers, and requesting seller concessions to reduce overall expenses. Additionally, shopping around for the best rates on title insurance and other fees can lead to significant savings. Implementing these strategies can help you save thousands on closing costs when buying a home.

### **Why is understanding closing costs important?**

Understanding closing costs is crucial for accurately budgeting and avoiding unexpected expenses on closing day. It enables buyers and sellers to negotiate effectively, compare loan offers, and ensure a smooth transaction. Being well-informed about closing costs helps prevent financial stress and ensures a successful home-buying or selling experience.

### **What methods can I use to calculate closing costs?**

You can calculate closing costs using online calculators for quick estimates or consult with lenders for detailed breakdowns through a Loan Estimate form. Online calculators consider factors like purchase price, loan amount, and location, while lenders provide precise fees associated with your specific loan. Using both methods ensures you have a comprehensive understanding of your expected closing costs.

### **Can sellers contribute to closing costs?**

Yes, sellers can contribute to closing costs through seller concessions. This means the seller agrees to pay a portion of the buyer’s closing costs, which can reduce the buyer’s financial burden. Negotiating seller concessions is a common strategy to make the deal more attractive and affordable for the buyer, helping both parties reach a mutually beneficial agreement.

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## Grow your real estate portfolio with OfferMarket

OfferMarket is a real estate investing platform. Month-in-month-out, thousands of real estate professionals leverage our platform to grow and optimize their business. Our mission is to help you build wealth through real estate and we offer the following benefits to our members:

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Learn how to calculate closing costs effectively. This guide covers essential steps and tips to ensure you're financially prepared for your home purchase.

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How to Calculate Closing Cost: Comprehensive Guide for Homebuyers

Understanding Closing Costs

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