This BLOG On Sellers Concessions And Closing Costs Mortgage Guidelines On Home Purchase Was UPDATED And PUBLISHED On October 16th, 2020
There are a lot of costs involved when purchasing a new home.
- The down payment on a home purchase is fixed set percentage
- However, the closing costs on a home purchase is dependent on many factors
- Closing costs depends on the type of property and the county and state the property is located
- Every borrower has a different figure for closing costs
- Most closing costs can be paid with a seller’s concession by the home seller and/or lender credit by the lender in lieu of higher mortgage rates
- Borrowers with lower credit scores will get a loan level pricing adjustment (LLPA) on mortgage rates
Borrowers with under 600 credit scores may have to pay discount points. Discount points are additional closing costs. Discount points can be paid with sellers concessions.
Sellers Concessions And Closing Costs: Down Payment Requirements And Closing Costs
The down payment on a home purchase is easy to calculate.
- The down payment is a percentage of the purchase price
- Every loan program has a different down payment requirement
- VA and USDA loans do not require any down payment
- Lenders offer 100% financing on VA and USDA loans at competitive rates due to the government guarantee
Below is the down payment requirements on home mortgages:
- On FHA insured mortgage loans, the minimum down payment required is 3.5%
- On conventional mortgage loans, the minimum down payment required is 5%
- There are 3% down payment conventional mortgage loan programs as well
- But the credit criteria is stricter than the 5% down payment conventional mortgage loan program
- Non-QM loans require a 10% to 30% down payment on home purchases
- Besides the down payment, a home buyer will also encounter closing costs that sometimes can be more than the down payment
In this article, we will discuss on what closing costs are and how to pay it through third-party lender credit and/or concessions.
What Are Sellers Concessions And Closing Costs?
Closing costs includes title charges, transfer stamps, inspection fees, appraisal fees, discount points, underwriting fees, attorney fees, and other fees depending on the state you are closing your new home at.
- Besides closing costs, a home buyer will probably need to spend money on moving costs, new furniture, and minor repairs on their new home
- By requesting a sellers concession towards a buyer’s closing costs can be a phenomenal advantage to the new home buyer
- Homebuyers do not want spend every penny they have on the cost of buying their home
Florida Mortgage Broker Advice
Florida leads the nation as having the highest number of in-migration of not just individuals and families, but has the highest number of small business owners moving to the state than any other state in the nation.
- This is due to having no state income taxes
- Besides no state income taxes, Florida has one of the lowest tax rates on just about everything
- The Governor and state lawmakers are smart and know how to run state government
- It is not how much you take in but rather what you spend
- Governor Ron DeSantis recently said that he believes collecting 10 cents on the dollar and invest 90 cents to make his state better and attract new taxpayers than collect 90 cents in taxes and only invest 10 cents where taxpayers will be fleeing the state
- Illinois, led by rookie freshman Governor J.B. Pritzker is being run into the ground due to high and increasing taxes
- Illinoisans are getting voter’s remorse for electing the obese heavy-set rookie politician J.B. Pritzker
- Pritzker’s solution to fixing the state’s major budget deficit is to keep increasing and creating new taxes
- Pritzker has raised taxes in over 20 different items since taking office as governor of Illinois
- He has even doubled the state’s gas tax
- The straw that broke the camel’s back is Pritzker is now proposing his so called FAIR TAX which is changing the state’s current flat-tax to a progressive tax system
- Pritzker is lobbying for Illinoisans to vote for his FAIR TAX this November 3rd, 2020
- Once voters vote for the FAIR TAX, it will need an amendment o the Illinois State Constitution for it to become law
- The constant tax increases in Illinois is taking a toll in the out-migration numbers
- More and more Illinoisans are fleeing to states with lower taxes and low cost of living such as Florida
- Illinois property taxes are now the highest in the nation
- High property taxes mean depreciating housing value
- Florida has one of the hottest housing markets in the nation in part due to low property taxes
There is more demand for housing than inventory in Florida. Bidding wars is very common throughout the Florida housing market that many homebuyers are scared to ask for seller’s concessions.
Maximum Amount Of Sellers Concessions Allowed
Sellers concessions and closing costs go hand in hand. Sellers credit towards closing costs are allowed with most mortgage loan programs.
- HUD allows up to 6% in sellers concessions towards buyers closing costs
- VA allows 4%
- USDA allows 6%
- Owner occupant conventional loans allow up to 3%
- Investment properties is capped at 2% with conventional loans
- In many cases, having a sellers concession makes a real estate purchase happen
- This is because many real estate home buyers are limited with funds
- Some home buyers only have the down payment and cannot afford closing costs
- There are two ways of covering for closing costs on a home purchase
- The first method is by getting credit by the seller
And the second method is by getting a lender’s credit towards closing costs in lieu of accepting a higher mortgage rate.
Case Scenario On Covering Closing Costs
For example, let’s say John Smith is buying a $200,000 home in Miami, Florida.
- John Smith gets approved for an FHA loan at a rate of 3.25%
- John Smith needs to come up with a 3.5% down payment or $7,000
- The down payment can be gifted to John Smith by a family member
- Say John Smith does not have any additional funds besides the $7,000
- John Smith can get credit by the seller of up to $12,000 from the seller of the subject property
- Normally a sellers concession cannot exceed 6% of the purchase price
- Say the closing costs for John Smith’s new home is $6,000
- The seller can contribute the $6,000 towards John Smith’s closing costs
- In the event, if the seller offers a $12,000 credit to John Smith and John Smith’s closing costs are only $6,000, who gets the difference of the $6,000 leftover credit?
- The balance goes back to the seller
- Overages in sellers concessions can go to buying down the mortgage interest rates with discount points
- John Smith cannot pocket the leftover credit and he cannot use it towards moving costs
Homebuyers who need more information on this topic or any other lending questions, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at email@example.com.
This article was updated on October 16th, 2020