Sellers Concession Used To Cover Buyers Closing Costs

This BLOG On Sellers Concession Used To Cover Buyers Closing Costs Was UPDATED And PUBLISHED On August 11th, 2020

A seller’s concession towards a buyer’s closing costs is when a home seller gives a certain dollar amount to the buyer so the buyer can use it towards the buyer’s closing costs.

What are closing costs?

  • Both a buyer and a seller have closing costs

A buyer’s closing costs include the following:

  • appraisal fees
  • credit report fees
  • origination charges
  • points
  • title charges
  • insurance
  • pre-paid
  • other costs associated with the purchase and financing the property

In this article, we will discuss and cover Sellers Concession Used To Cover Buyers Closing Costs.

There are caps on the maximum that applies to sellers concession:

  • FHA allows up to a 6% sellers concession credit towards a buyer’s closing costs
  • Conventional loans have a maximum cap of 3% on how much a seller can contribute towards to a buyer’s closing cost on owner occupant homes and 2% on investment homes
  • VA loan programs will limit up to a 4% sellers concession towards a buyer’s closing costs
  • USDA Loans allows up to 6% sellers concessions

In this article, we will discuss and cover the topic of Sellers Concession Used To Cover Buyers Closing Costs.

Mechanics Of Sellers Concession

Sellers Concessions

Many home buyers will only have limited funds on a home purchase.

  • The home buying process can be quite costly
  • Not only do home buyers need a down payment and closing costs
  • There are many associated costs involved with a move to a new home

Besides moving costs, new home buyers might need to take time off work, purchase new furniture and appliances, or decide to do either minor or major remodeling prior to moving into their new home.

Down Payment On Home Purchases

Mortgage lenders will require that the home buyer have a down payment.

  • FHA minimum down payment requirements are 3.5%
  • For conventional mortgage loan programs, minimum down payment requirements are 5% down payment
  • Besides the down payment, the home buyer needs to be concerned with closing costs
  • Closing costs can range anywhere between 2% to 6%
  • Sometimes even more of the purchase price of a home depending on what state and county new home purchase is
  • Homeowners insurance and flood insurance are part of closing costs
  • Sometimes homeowners insurance and flood insurance can be extremely costly, especially if the home is an older home and the home is in a flood zone
  • Many lenders will charge a higher mortgage rate if credit scores are below 600
  • Sometimes Loan Level Pricing Adjustments (LLPA) is as much as 1.0% higher in rates
  • Borrowers can get a reduced rate by paying points

Borrowers can use seller concession from the seller to buy down mortgage rates.

How Does Seller Concession Towards Buyer’s Closing Costs Work

How Does Seller Concession Towards Buyer's Closing Costs Work

The seller concession is requested when a home buyer first enters into a real estate purchase contract.

  • Let’s take a simple case scenario
  • Let’s say that a home is listed for $110,000 and that the bare bottom price the seller is willing to take to the home is $100,000
  • If the home buyer is getting an FHA loan, the maximum seller concession allowed if 6% of the purchase price
  • If the home buyer is getting a conventional loan, the maximum seller’s concession allowed per FANNIE MAE guidelines is 3% of the purchase price

In this case scenario, let’s say the home buyer is getting an FHA loan.

Negotiating Sellers Concessions Prior To Signing Purchase Contract

Both the home seller and the home buyer can negotiate a purchase price of $106,000 with a $6,000 sellers concession towards the buyer’s closing costs:

  • This means that the net bottom price to the home seller is $100,000
  • This is because the settlement statement will reflect that the home seller is crediting $6,000 towards the buyer’s closing costs
  • The buyer can only use the sellers concession only towards closing costs and the buyer’s escrow accounts held by their mortgage lender
  • Any excess or leftover funds from sellers concession needs to go back to the seller
  • It is illegal for the seller to give the home buyer the leftover sellers concession

The key here is to make sure that the home buyer does not waste any sellers concession credit.

What If The Sellers Concession Will Not Cover The Closing Costs?

What If The Sellers Concession Will Not Cover The Closing Costs?

There are times when the sellers’ concession will not cover the home buyer’s closing costs due to unexpected higher than expected closing costs.

  • One such example is when a home buyer gets a quote for their homeowners’ insurance
  • But the insurance company tells the home buyer that their insurance premium is much higher than the original quoted amount
  • On cases like these, there are solutions
  • One such solution is that the home buyer can request a lender’s credit towards closing costs

A lender’s credit towards the borrower’s closing costs is when the lender will give the borrower a set amount of credit to offset their closing costs in lieu of a slightly higher mortgage rate.

Case Scenario

For example, let’s take a case scenario:

  • borrowers have an FHA $100,000 mortgage at 4.25% at par (which means the borrower does not pay any points nor does the borrower receive any credit )
  • the borrower needs an extra $1,500 in closing costs
  • this is because the sellers’ concession will not cover the borrower’s full closing costs
  • the mortgage lender can give the borrower the $1,500 lender’s credit towards the closing cost shortage
  • this is in lieu of a 4.5% mortgage rate versus the 4.25% mortgage rate initially approved
  • If the borrower is short $3,000 in closing costs, the lender can possibly increase the mortgage rate to 4.75%
  • This is 0.50% higher than the original 4.25% par rate in lieu of covering the shortage in closing costs
  • the above rates used are hypothetical rates and nor real rates used for illustration purposes only
  •  

A change of circumstance form needs to be completed by the mortgage processor:

  • The borrower needs to qualify for debt to income ratios to make sure that they qualify
  • Higher mortgage rates due to lender credit mean a higher mortgage monthly payment which increases borrowers debt to income ratios
  • Even though a 025% or 0.50% might only be a very nominal increase in borrower’s monthly mortgage payment, it does pose a problem for those who have a borderline debt to income ratios

For more information about this article and/or other mortgage-related topics, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com.

2 Comments
  1. KC AZ says

    Hi Gustan,

    Nice article. If the seller’s concessions do not cover all of the closing costs, who decides where the seller’s concession is applied first? Does it go to mortgage costs or escrow/title? I’ve never seen a purchase contract specify. Thanks!

    1. Gustan Cho, NMLS 873293 says

      The sellers concessions need to be listed on the real estate purchase contract. On your LE is the itemized closing cost estimate. Your loan officer will go over line item per line item and recommend which closing costs will be paid for with a sellers concessions.

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