Sellers Concession: Offsets Closing Costs

If you are a home buyer and want to offset your closing costs, make sure that you request a sellers concession towards your closing costs.  A sellers concession, or sellers contribution, is a dollar amount that a property seller will give a home buyer towards the buyer’s closing costs.  However, if you do not use up all of the sellers concession and have a sellers concession overage, then the left over proceeds goes back to the seller and not the buyer.

Kickbacks Are Not Allowed With Overages

Giving the left over sellers concession to the home buyer is known as a kickback and it is not allowed.  The Federal Housing Administration allows up to a 6% sellers concession for FHA insured mortgage loans.  Conventional mortgae loans allow up to a 3% sellers concession towards a buyer’s closing costs.  Sellers concessions can only be used for closing costs and not towards the down payment.  Closing costs are title charges, attorneys fees, transfer stamps, transfer taxes, homeowners insurance, and other costs and fees associated with closing the loan.  Sellers concession overage cannot be used towards down payment and any sellers concession overage needs to go back to the seller.

Cash To Close: Closing Costs

Home buyers will be required to come up with the down payment and closing costs on a home purchase.  Down payment funds are normally 3.5% down payment for FHA insured mortgage loans and 5% down payment for conventional mortgage loans.  On top of the down payment, there are closing costs which vary depending on the county and the state the property is at.  Closing costs can range anywhere of 2% or more.  Most sellers have no problem giving a sellers concession to a home buyer.  Let’s take a case scenario:  Say a home seller wants a bottom line net price of $100,000 and not a dime less.  The home buyer is requesting a 6% sellers concession since it is a FHA insured mortgage loan.

How Does Sellers Concessions Work?

What the seller will do is raise the purchase price to $106,000 and give the home buyer a $6,000 sellers concession towards the buyers closing costs where the home buyer only needs to come up with the down payment.  Sellers concessions can be used for prepaids as well;  Two months property tax escrows, and two months homeowners insurance escrows as well as paying the one year homeowners insurance premium.  What happens if there is a sellers concession overage?

Sellers Concession Overage?

As mentioned earlier, sellers concession overage cannot go to the seller.  It needs to go back to the seller.  However, if there is a sellers concession overage, you do not want to waste it.  Many times when I run into a sellers concession overage, I use the excess funds to buy down the mortgage loan borrower’s mortgage rates.  You can buy down mortgage rates by paying points and paying down your rate by paying points is part of your closing costs.

By Gustan Cho

www.gustancho.com

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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