Sellers Concessions To Pay For Closing Costs On Home Purchase

Homebuyers should ask for sellers concessions from the seller of the home to pay for closing costs. There are two types of costs on a home purchase. The down payment and closing costs. Most homebuyers do not have to come up with closing costs. They just come up with the down payment. Sellers concessions are closing cost credits given by the home seller to buyers to cover part, most, or all of the home buyer’s closing costs.  Proceeds from sellers concessions can be used for any type of closing costs incurred by the home buyer. In the event, if the homebuyer is short in closing costs, the lender can offer lender credit in lieu of a higher mortgage rate.

What Can Sellers Concessions Be Used For?

Sellers Concessions can be used to cover the following closing cost, but cannot be used for the down payment on home purchase:

• title charges
• state and county transfer stamps and fees
• recording fees
• attorneys costs
• inspection fees
• upfront points
• appraisal fees
• homeowners insurance
• pre-paid
• escrows
• any other fees and costs associated with the purchase and closing of the mortgage loan

Homebuyers cannot use sellers concessions cannot be used towards the down payment of the home purchase. Sellers concessions can also be used to buy discount points. Discount Points are used to lower borrowers’ mortgage rates.

Are There Limits For Sellers Concessions

Depending on which mortgage loan program a mortgage loan applicant chooses, each mortgage loan program has their own maximum amount of sellers concessions allowed. Under HUD, the parent of FHA,  FHA allows a maximum of 6% sellers concessions. For VA loans, the maximum amount of sellers concession sellers can offer buyers is 4%. USDA loans allow a maximum seller’s concession of 6%. With conventional loans, if purchasing an owner-occupant home, a maximum of 3% seller’s concession is allowed. If a home buyer is purchasing a second or vacation home, a maximum of 3% seller’s concession from the home seller to the home buyer is allowed. However, if the buyer is purchasing an investment home, then the maximum a home seller can offer in sellers concessions is no more than 2% sellers concession to the investment home buyers.

What Happens If There Are Overages In Sellers Concessions

Overages in sellers concessions will need to go back to the home seller. Cannot go to the home buyer in the form of cash or other incentives. In general, closing costs average about 2% of the home purchase price depending on what county and state the home are located in. FHA loans allow up to 6% sellers concessions for the home seller to give the home buyer. If the home buyer requests a 6% sellers concession from the home seller and only uses 2%, the home buyer needs to return the 4% of the unused sellers concession to sellers. Requesting a kickback of the unused portion of the sellers concessions is not allowed under any circumstances and is considered mortgage fraud.

Down Payment And Closing Costs Requirements On Home Purchase

There are two types of costs that a home buyer is required to pay on any home purchase.

• The first is the down payment
• The down payment required varies depending on the loan program buyer chooses
• Two loan programs, USDA and VA, do not require any down payments
• FHA loans require a 3.5% down payment
• Owner-occupied conventional loans require a 3% down payment for first time home buyers
• 5% down payment for traditional conventional loan programs
• Second-home conventional loans require a 10% down payment
• Investment homes require a 20% down payment
• Jumbo mortgages require a 20% down payment
• Condotel unit mortgage loans require a 25% down payment
• Non-Warrantable condominium purchases require a 20% down payment

How Much Should Mortgage Closing Costs Be?

All home purchase transactions have closing costs. Closing costs are costs associated with the closing of a home purchase

Examples of closing costs include the following:

• title charges
• transfer stamps
• inspection costs
• appraisal fees
• upfront points
• homeowners insurance
• pre-paid items
• any other costs and fees associated with the closing of a home loan

Most home sellers will give a home buyer closing costs credit via sellers concessions. Most buyers do not have to worry about closing costs.  In the event, if the home seller does not want to give a sellers concession for whatever reason, lenders can offer lenders credit towards home buyers closing costs in lieu of a higher mortgage rate. For more information on this blog or other topics, please contact us at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.

How Can I Waive Paying Closing Costs On My Home Purchase And Get It Paid?

Many home buyers have limited funds when buying a new home. There are ways of being creative on a home purchase and more often than not. Homebuyers do not have to worry about closing costs. This is because it can be covered in the following ways:

• Seller concessions from home buyers
• Lender credit to cover closing costs by lenders

In the following paragraph, we will cover and discuss using sellers concessions to cover closing costs on a home purchase.

How Much Money Do I Need To Buy A House With A Mortgage

There are two types of costs involving home purchase:

Down Payment:

• Home Buyers need to show that they have their own down payment on a home purchase
• Down payments can be gifted

Closing Costs:

• Most homebuyers do not have to worry about closing costs on a home purchase
• This is because closing costs can be covered with either a seller concessions and/or lender credit

Down Payment Requirements On Home Purchase

Every loan program has its own down payment requirements. The only two mortgage loan program that does not require any down payment on a home purchase. They are the following:

1. VA Home Loans
2. USDA Loans

The minimum down payment needed on a home purchase is 3.5% on an FHA mortgage loan. The minimum down payment required on a conventional loan is 3% for first-time homebuyers and 5% for home buyers. VA and USDA loans do not require down payment and offer 100% financing. Closing costs can run more than the down payment and can run into thousands of dollars. FHA Loans allow up to 6% sellers concessions of the purchase price towards closing costs. What this means is that a home seller can give a homebuyer up to 6% of the home purchase price as a sellers concession. So the home buyer can use it towards any closing costs. VA Loans allow up to 4% sellers concessions. Conventional Loans allow up to 3% sellers concessions on owner-occupant properties. Second homes and 2% on investment homes. Sellers concessions are very important in many home purchases. Sellers concessions are often a necessity to make the deal happen. This is because many home buyers only have the down payment and not the closing costs on a home purchase.

What Can Seller Concessions Be Used For?

The seller concessions can be applied towards and closing costs associated with the home purchase. Here are examples of closing costs:

• Discount points
• Title charge charges
• Transfer stamps
• Recording fees
• Home Inspections
• Appraisal costs
• Surveys
• Mortgage loan origination fees
• Mortgage processing and underwriting fees
• Attorneys fees
• Inspection fees
• Pre-Paid:
• Real estate and insurance escrows
• Other costs associated with closing

How Sellers Concessions Help Homebuyers Not Come Out Of Pocket For Closing Costs

Seller contributions towards closing costs is a great program for both the buyer and seller. For homebuyers who are limited with funds, having the seller pay the closing costs will make the home purchase possible. The home seller who is offering the concession towards closing costs makes the sale of the home possible. Ultimately, the seller gets their net price from the sale of the house. Bottom line is that the seller does not lose anything. This is because the sellers concessions are part of the home purchase price.

Case Scenario On How A Home Purchase With Seller Concessions Work

For example, here is a case scenario on home purchase:

• if the seller wants to net $100,000 for his home
• the seller can still get his $100,000

By giving the seller concessions of $6,000 to the homebuyer, the real estate purchase price goes up to $106,000. The seller does not give anything for nothing because the seller has $6,000 to the bottom line price they wanted. The homebuyer does not come up with any closing costs because it is paid by the seller concessions.

How Paying Closing Costs With Seller Concessions Works

Before shopping for a home, make sure that the pre-approval is solid. Most loan officers will run credit and AUS FINDINGS prior to issuing a pre-approval letter. Loan Officers should do full credit analysis. Loan Officers can also estimate tentative closing costs and the down payment required. Loan Officers will also get you an approximate monthly housing payment. Closing costs can be more than the down payment. This is depending on what county and state the property is. Some states cost much more than other states due to tax stamps and other state fees.

Lenders Can Offer Lender Credit For Closing Costs In Lieu Of Higher Rate

Homebuyers who are limited on funding besides the down payment they can get closing costs covered with sellers concessions or lender credit. The majority of home sellers have no problem in offering seller concessions. But home buyers need to make sure their realtor requests the sellers concession. The seller’s contribution needs to be written on the real estate sales contract. Make sure realtor and loan officers communicate prior to making an offer.

FAQ On Sellers Concessions On Home Purchase Transactions

Many home buyers often get confused about How Seller Concessions Work.

• There are two types of costs involved when buying a home
• The down payment and closing costs
• Most of our borrowers at Gustan Cho Associates do not have to worry about closing costs
• Our borrowers just need to worry about the down payment
• Closing costs are normally covered by a seller concession and/or a lender credit
• Most home sellers will give homebuyers a seller concession so the buyers can cover the closing costs
• A seller concession can only be used for closing costs
• Homebuyers cannot have overages in seller concessions
• If there are overages in seller concessions, it needs to go back to the home seller
• However, this does not happen
• If a loan officer realizes there are overages in seller concessions, the loan officer will use the overage in buying down the rate through discount points

Seller concessions cannot be used for the down payment. It can only be used for closing costs and pre-paid costs.

How Seller Concessions Work For Buyers And Sellers

http://www.youtube.com/watch?v=OtC6jYd35uA&ab_channel=Gustan Cho Associates-MortgageBankers

Most of the clients at Gustan Cho Associates do not pay closing costs out of pocket. Closing costs are normally paid for with a seller concession by the home seller. Each home mortgage program has its cap on the maximum seller concession the home seller can contribute. Closing costs are not a set amount. Closing costs are dependent on the location of the property, type of property, loan size, origination charges of the lenders, discount points, and other third-party costs and fees. Closing costs range anywhere between 2% to 6% or more.

Sellers Concessions Is Not Free Money By The Home Seller

A seller concession is when the home seller will inflate the cost of the home purchase by the cost of the seller concession. Say the home seller wants a bottom-line price of $100,000 on the sale of their home. However, in order for the homebuyer to purchase the home, the buyers need $6,000 in closing cost credits they do not have The buyers only have a 3.5% down payment So what the home sellers can do is increase the purchase price to $106,000 and give the buyers a $6,000 seller concession to cover their closing costs.

Seller Concessions Is Used For Most Buyers To Cover Closing Costs

In the event, if the home seller is short on covering closing costs, the lender can offer a lender credit towards the shortage of closing costs in lieu of a higher mortgage rate.

Common Closing Costs On Home Purchase

Down payments are a fixed amount of the home’s purchase price. For example, HUD requires a 3.5% down payment on a home purchase on FHA loans. Fannie Mae and Freddie Mac require a 3% to 5% down payment on conventional loans. VA and USDA loans do not require any down payment on a home purchase. Lenders offer 100% financing on VA and USDA loans. However, closing costs vary between 2% to 6% or more. The following are examples of closing costs on home purchase:

• Home appraisals
• Pre-paid property taxes
• Home inspection
• One year’s upfront hazard insurance premium
• Pre-paid interest
• Attorney fees if applicable
• Recording fees
• Lender origination fees
• Lender discount points
• Title search and insurance costs
• FHA upfront mortgage insurance can be rolled into the balance of the FHA loan

How To Utilize Sellers Concessions So You Maximize Coming Money Out Of Pocket

Seller concessions, sometimes called seller credits can be a confusing mortgage topic. The team at Gustan Cho Associates will detail how to utilize seller concessions. We will explain the maximum seller concessions allowed per loan product and your minimum investment requirement. Seller concessions are becoming more common in the mortgage market. This is due to the increase in home values across the country.

Seller Concessions Explained

What is a seller concession?  Seller concessions simply mean the seller paid closing costs. The seller can contribute a dollar amount or a percentage towards your closing costs. In the following paragraphs, we will cover and discuss Seller Concessions Guidelines On Mortgages.

Seller Concessions Guidelines On Mortgages On The Amount Allowed

The amount of seller concessions allows varies with each loan product. If you get more credit than the maximum allowed, your loan cannot fund. It is important to stay within these threshold numbers, even after any renegotiations. We will dive into that topic soon.

FHA Loans:

• 6% of the purchase price

Conventional (primary residence) 

• 3% of the purchase price for any LTV of 90% or higher
• 6% of the purchase price for any LTV of 75.01% to 90%
• 9% of the purchase price for any LTV of 75% or less

VA Loans

• 4% of the purchase price

USDA Mortgage

• 6% of the purchase price

NON-QM Loans

• 6% of the purchase price 

Conventional (investment property)

• 2% of the purchase price

NON-QM (investment property)

• 2% of the purchase price

Can Sellers Concessions Be Negotiated

When do you negotiate seller concessions?

• There are two main times in seller credits are negotiated
• Upfront when you submit your offer to the seller and once again after the home inspection
• Asking for seller credit at the time you place your offer is a very common practice
• Home prices are on the rise once again and more and more funds are needed to purchase a home
• The rise in seller credit is a trend we have seen throughout the mortgage industry

The next main time seller concessions are negotiated is after you receive your home inspection report.

Importance Of Home Inspection

A home inspection is different than a home appraisal. We do not require an inspection, but we highly recommend completing one. You are buying a long-term asset. Most homes cost hundreds of thousands of dollars. A couple of hundred dollars upfront to have the home inspected is a great idea for such a large investment.

Please see our HOME INSPECTION BLOG for more details.

Seller Concessions For Repairs And Deferred Maintenance

Once you get the home inspected and you receive the report, you may notice a few items that need to be fixed. Any major items such as holes in the wall or missing windows or railings will need to be completed before the lender may close that mortgage. However, for smaller items, such as dated carpet, older appliances, or a faulty window or two can be the go she ate it into seller concessions. Let’s say the carpet needs to be replaced throughout the house. You anticipate this to cost about $1,000. You at this point can negotiate with the seller and your attorneys for an additional $1,000 seller credit. This will come off the final dollar amount you need to bring to closing, freeing up money for you to replace the carpet after closing.

Caps On Credit By The Home Seller

As stated above, you must stay under the maximum seller credit thresholds for your loan products. The amount of seller concessions you negotiate upfront, combined with the seller concessions ask for after the home inspection, must be below the allowable threshold. Seller concessions are lumped into one cumulative total which must be under the threshold

Who Quarterbacks Concessions Between Buyers And Sellers?

Who will coordinate the negotiations surrounding seller concessions?

• Seller concessions asked for at the time of submitting your offer are negotiated by your realtor
• If you are not using a realtor, you will add these concessions to the contract you submit
• Seller concessions asked for after the home inspection is usually negotiated by your real estate attorney
• If you are not using a real estate attorney, your realtor should be able to negotiate these with the seller’s agent
• If you are not using a real estate agent, you are on your own for the negotiations

Please check out our article on the benefits of USING A REALTOR for your transaction. 

Seller Credit Guidelines On Mortgages For Overage Credits

Can you ask for too much credit?

• You may not exceed the maximum percentage threshold of seller credits for your specific loan product
• Assuming you are under that threshold, any remaining seller credit will be applied to buying your interest rate down
• You must be a minimum investment requirement per your loan guidelines
• For example, with an FHA mortgage, you must contribute a minimum of 3.5% towards the closing of your verified funds
• In states such as Illinois, or property taxes are paid in arrears, you may not need to bring the full 3.5%
• The rule of minimum investment requirements is 3.5% minus the tax prorations

Many borrowers get confused with minimum investment requirements.

Lenders Steering Borrowers To Preferred Lenders

Builder’s lenders and incentives to use their lender.

• If you are building a home, I am sure you have talked to the builder’s lender
• The majority of builders have a working relationship with a mortgage company
• Typically, this lender will give you incentives to use them
• This is because the builder has a financial interest in that lender
• Many times, they will offer you a large seller credit utilize their lender
• Most of the time they will tell you the incentives will go away if you do not use their lender
• We have seen numerous cases where that is just a smokescreen
• Of course, they want you to use their lender, but they also need to sell their homes
• We have closed numerous new construction mortgages where builders still gave the incentives and used Gustan Cho Associates as their lender
• If these incentives are over 3% or 6% (depending on the loan program) of the purchase price, they will lower the purchase price
• The main takeaway on new construction incentives is, do not let the builder bully you into utilizing their lender
• Most builder’s lenders have strict LENDER OVERLAYS
• This is why many families cannot qualify with them

Don’t be afraid to demand the incentives and work with Gustan Cho Associates as your lender!

Qualifying For A Home Loans With A Lender With No Overlays And Experts On Seller Concessions Guidelines

In today’s rapidly evolving mortgage market seller concessions are incredibly popular. The Team at Gustan Cho Associates are experts in maximizing your seller credits. In fact, many of our borrowers rely on seller credits to close their mortgage transactions. Let’s face it saving for the down payment is hard enough and we could all use a little help on the closing cost. If you have any mortgage questions, please reach out to the Gustan Cho Associates at Lone cabin. We are available 7 days a week and in the evenings. 75% of our clients have been denied a mortgage and we will work with you to qualify as soon as possible! Many times, it is a lender overlay that gets in the way. we are experts in manually underwriting and are ready to help you purchase your next home. Please call Mike Gracz at 630-659-7644 to schedule a one-on-one mortgage consultation today.