What Is A Sellers Concession?
A sellers 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 cost? Both a buyer and a seller have closing costs. A buyer’s closing costs includes appraisal fees, credit report fees, points, title charges, insurance, pre-paids, and other costs associated with the purchase and financing the property. There are certain maximum that apply 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. VA loan programs will limit up to a 4% sellers concession towards a buyer’s closing costs.
Mechanics Of Sellers Concession
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, but 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 in to their new home.
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% or sometimes even more of the purchase price of a home depending on what state and county your new home purchase is. Homeowners insurance and flood insurance are part of closing costs and 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 mortgage lenders will charge you a higher mortgage rate if your credit scores are below 600 FICO, sometimes as much as 1.0% higher in rates. You can get a reduced rate by paying points and you can use your seller concession from the seller to pay down your mortgage rates.
How Does Seller Concession Towards Buyer’s Closing Costs Work
The sellers 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 a FHA loan, the maximum seller concession allowed if 6% of the purchase price. If the home buyer is getting a conventional loan, the maximum sellers concession allowed per FANNIE MAE mortgage lending guidelines is 3% of the purchase price. On this case scenario, lets say the home buyer is getting a FHA loan. 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 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 left over funds from sellers concession needs to go back to the seller. It is illegal for the seller to give the home buyer the left over 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?
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 mortgage loan borrower’s closing costs is when the mortgage lender will give the borrower a set amount of credit to offset their closing costs in lieu of a slightly higher mortgage rate. For example, if the mortgage loan borrower has a FHA $100,000 mortgage loan at 4.25% at par ( which means the borrower does not pay any points nor does the borrower receive any credit ) but the borrower needs an extra $1,500 in closing costs because the sellers concession will not cover the borrower’s full closing costs, then the mortgage lender can give the mortgage loan borrower the $1,500 mortgage lender’s credit towards the closing cost shortage 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 mortgage lender can possibly increase the mortgage rate to 4.75%, which is 0.50% higher than the original 4.25% par rate in lieu of covering the shortage in closing costs. A change of circumstance form needs to be completed by the mortgage loan processor and the mortgage loan borrower needs to qualify for debt to income ratios to make sure that they qualify because a higher mortgage rate, means a higher mortgage monthly payment. Even though a 025% or 0.50% might only be a very nominal increase in the mortgage loan borrower’s monthly mortgage payment, it does pose a problem for those who have borderline debt to income ratios.