Sellers Concession For Buyers Closing Costs Lending Guidelines
This Article Is About Sellers Concession For Buyers Closing Costs Lending Guidelines
There are two types of costs on a home purchase.
- The down payment and closing costs
- The down payment is a fixed percentage of the home purchase price
- The amount of the down payment depends on the particular mortgage program
- For example, HUD requires a 3.5% down payment on a home purchase FHA loan
- Borrowers can qualify for an FHA loans with credit scores down to a 500 FICO with an approve/eligible per automated underwriting system (AUS)
- However, per HUD Agency Guidelines, borrowers with under 580 FICO and down to a 500 credit score need to put a 10% versus a 3.5% down payment on a home purchase
- VA and USDA loans do not require any down payment on a home purchase
- Lenders offer 100% financing on VA and USDA loans at low rates due to the government guarantee
- Fannie Mae and Freddie Mac require a 3% down payment for first time homebuyers on conventional loans
- A first time homebuyer is a homebuyer who did not have any ownership on a property in the past 3 years
- Otherwise, a 5% down payment on a home purchase is required on conventional loans
Sellers Concession For Buyers Closing Costs Can Cover Most Or All Of Home Buyers Closing Costs.
Most Homebuyers Pay For Closing Costs With Seller Concession
If home buyers are short on closing costs with a seller concession, lenders can give buyers lender credit in lieu of higher interest rates:
- Home Buyers need to come up with down payment and closing costs on the home purchase
- VA Loans and USDA Loans do not require down payment but do require closing costs
- Besides the down payment on the home purchase, all borrowers will have closing costs on purchase and refinance loans
- Closing costs are not fixed
- Closing costs depends on the various factors
- Closing costs depends on the type of loan, type of property, type of occupancy, loan size, area the property is located, and other factors
Examples Of Closing Costs
Closing costs on a home purchase are the following:
- Appraisal fees
- Attorneys fees
- Title charges
- Recording Fees
- Transfer Stamps
- Home inspection fees
- Prepaid closing costs which are upfront escrows for taxes and insurance
- Other fees which can accumulate thousands of dollars
How Much Are Closing Costs
Closing costs vary depending on where the real estate purchase transaction takes place. Down payment is a fixed percentage, however, closing costs vary from county to county and state to state.
- Every county and state has different transfer stamp and intangible tax fees and recording charges.
- Even if home buyers have the funds to cover closing costs, why not keep those funds for reserves for future remodeling or repairs
- Have closing costs covered with sellers concessions and/or lender credit
One of the most common and popular ways of covering all of closing costs is through a sellers concession for buyers closing costs.
What Is Sellers Concession For Buyers Closing Costs
A sellers concession for buyers closing costs is allowed for the home seller to contribute towards the closing costs of the home buyer by the home seller on a home purchase.
- Every loan program has a different amount of sellers concession a home seller can give a home buyer
- FHA loans allow up to a 6% sellers concession towards closing costs
- For example, if the seller wants a net amount of $100,000 for the bottom line when he closes on his house, the purchase contract can be for $106,000 with a $6,000 sellers concession towards closing costs
- By structuring the deal this way, home buyer will not have to come up with closing costs
- The sellers concession can be applied towards any closing costs such as title charges, upfront mortgage insurance premium, attorneys fees, appraisal fees, transfer stamps, and other third party closing costs
- Sellers concession for buyers closing costs cannot be used towards the home buyers down payment
- Any overages of sellers concession needs to go back to the home buyer
- Home seller cannot give a cash kickback to the home buyer
- Try negotiating on the best purchase price possible with the seller of the home
Sellers concessions is a great negotiation tool for home sellers.
Maximum Sellers Concession For Buyers Closing Costs Allowed
Every loan program has the maximum sellers concessions allowed:
- Conventional Loans allow up to 3% of sellers concessions for primary and second home financing
- Up to 2% sellers concession for investment home financing on conventional loans
- VA Loans allows up to 4% in sellers concession for buyers closing costs
- Most Jumbo Loan Programs will allow for 3% sellers concessions
Most NON-QM Loans and Bank Statement Loans allow up to 6% Sellers Concessions. However, it is up to the non-QM wholesale lender on the maximum sellers concession they will allow.
Sellers Concession Overages
Any sellers concession overages needs to go back to sellers. However, it is alright to have seller concession overages because any overages can go towards buying points to pay down mortgage interest rates.
On the above example, here is a case scenario:
- if a home buyer offered a seller a $106,000 for the home
- and requested a $6,000 sellers concession
- and the closing costs totaled only $4,000
- the $2,000 left over sellers concession goes straight back to seller
- A seller cannot give buyers the left over proceeds of a sellers concession
- So remember not to waste the sellers concession
- Left over sellers concessions can be used to buy discount points
Discount Points is when a borrower pays the lender for a lower interest rate.
What Is Lender Credit
Mortgage Lender Credit is when a lender gives a credit to borrower to cover closing costs in lieu of higher interest rates. The higher interest rate will remain for the term of the loan. It is best to get a lower interest rate and not get a lender credit. Lender credit cannot be used for down payment and is only allowed for closing costs.
If you have any questions about the contents of this blog 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 [email protected] The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.
This article was updated and revised on December 3rd, 2020