Sellers Concessions And Tax Prorations To Offset Closing Costs

Closing Costs

Sellers Concessions And Tax Proration

If you are intending on purchasing a home, you will need the down payment and closing costs.  Most home buyers want to put as little money down as possible and pay as little as possible in closing costs and roll the closing costs into the mortgage loan.

Home Purchase With No Money Out Of Pocket

There are instances where home buyers purchase their homes and with no money or sometimes walk away with money after their closing.  How can this happen when FHA mortgage loans require a minimum down payment of 3.5% and conventional loans require 3% or 5% down payments?   If you have a shrewd, sharp, experienced professional realtor and an experience mortgage loan officer, they can make it happen.

Make Sure You Get Sellers Concessions Towards Buyers Closing Costs

Closing costs are third party fees and costs that normally range around 2% of the purchase price of your home, depending on the state and county where you are purchasing your home.  Sellers concessions towards a buyers closing costs is allowed for both FHA and conventional mortgage loans.  FHA insured mortgage loans allow up to a 6% sellers concession towards a buyers closing costs.  Sellers concessions can be used for all closing costs including prepaid and upfront mortgage insurance premiums as well as discount points.  However, any left over sellers concession credit towards a buyers closing costs cannot go to the buyer if there are left over funds.  It needs to go back to the seller for any unused sellers concessions.  Conventional loans and jumbo loans allow a maximum of 3% sellers concessions towards a buyers closing costs.  If you can structure sellers concessions towards a buyers closing costs the right way,  a home buyer does not have to bring in a dime for closing costs to the closing table.  Sellers concessions cannot be applied towards a buyers down payment.

Down Payment For Home Purchase

Minimum down payments for a conventional loan is either 3% down payment or 5% down payment.  For FHA insured mortgage loans, the minimum down payment is 3.5%.  Down payment funds needs to be seasoned and sourced.  FHA insured mortgage loans allow down payments to be gifted, however, a gift letter must be signed by the donor and the money leaving the donor’s bank account into the recepients bank account must be sourced and provided.  Normally, a 30 day bank statement of the donor is required and a deposit slip and deposit to the receivers account needs to be provided.

Down Payment Needs To Be Sourced And Seasoned

The down payment of 3.5% of the purchase price of the home needs to be in the mortgage loan borrowers bank account until the date of the closing.   Unless a home buyer is purchasing a brand new home from a home builder, a home buyer will receive a tax proration from the seller.  Tax proration credits can be used towards closing costs as well as towards down payment.

Sellers Concessions And Tax prorations Credit To Be Used Towards Down Payment Of Home Purchase

Lets take a case scenario.  Let’s say a home buyer is purchasing a $100,000 home and wants to put as little money down as possible and come out of as little money out of pocket as possible for closing costs.  Lets say the home buyer is approved for a FHA insured mortgage loan, and property taxes for the subject property is $4,000.  The best way to structure this deal is to get a sellers concession of 6%.  Say the sellers wants a bottom line price of $100,000 but is willing to structure a sellers concession towards a buyers closing costs.  The realtor will then list the purchase price as $106,000 (assuming it will appraise at $106,000).  The home buyer will be required to have a 3.5% down payment at closing so 3.5% of $106,000 is $3,710.  The home buyer needs to pay the first year’s homeowners insurance premium upfront and he can use part of his $6,000 sellers concession to pay for his insurance, attorneys fees, appraisal fees,  title insurance charges, and all other closing costs.  Let’s assume that all of his closing costs including his prepaids are all covered in the $6,000 sellers concessions towards the buyers closing costs.  Now he will be getting a $4,000 tax prorations credits from the seller because property taxes in Illinois is always paid in arrears of one year.   With his $4,000 tax prorations credits, he can use to offset his down payment of $3,710.  So on this case scenario, the home buyer will walk away with $290.00 at closing.  Basically, on this case scenario, the home buyer got himself a home with zero money out of pocket and a cash surplus of $290.00.  Even though he needed to show a down payment of 3.5% down payment, no money out of pocket was needed to purchase this subject property due to the ample sellers concessions and tax prorations.   Cases like these is common on situations where sellers concessions tax prorations are large.

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