Are you the buyer?  And, the seller has agreed to pay up to 2.5% of the purchase price towards closing costs?  If that is the situation, I can see the title company's point.  The costs you incur on the cash-out financing of the "other" property will not show up on the settlement statement as "closing costs."  It would be difficult for the title company to show seller's concessions of closing costs that aren't on the settlement statement.

Maybe an alternative would be to mortgage both properties.  The one you are buying for as much as the lender will lend in light of the appraisal, the closing costs of which the seller's concessions could be applied toward; and, the cash-out loan for the balance.

Best,
Robert A. Franco
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