Seller concessions, also known as seller contributions or seller-paid closing costs, are a portion of the seller's proceeds that go towards the buyer's closing costs. This negotiated mortgage option can make it easier for the buyer to afford the home.
Here's how seller concessions can be used for FHA, VA, and Conventional loans:
FHA Loans: seller concessions
FHA Loans: With FHA loans, seller concessions can be used to pay for the buyer's closing costs, prepaid expenses, discount points, and other financing costs. FHA loans allow up to 6% of the home price in seller concessions.
A seller concession, or seller contributions, can help a buyer with a variety of closing and prepaid costs on an FHA loan. These may include:
Origination Fees and Discount Points: These are costs associated with creating the loan and reducing the interest rate.
Third-party Charges: These charges come from parties other than the lender involved in the home purchase. Examples might include a fee for a credit report from a credit bureau, a fee for an appraisal from an appraisal company, or fees for a title search and title insurance from a title company.
Prepaid Expenses: This category typically includes homeowners' insurance premiums, property tax payments, and per diem prepaid interest that accrues on the loan between the settlement date and the first mortgage payment.
Inspection Fees: Fees for home, radon, or pest inspections can also be covered.
Up-front Mortgage Insurance Premium (MIP): FHA loans require an upfront mortgage insurance premium, which can be paid for with seller concessions.
Other Closing Costs: Other miscellaneous closing costs associated with the loan might be covered as well.
Note that seller concessions cannot be used for the down payment on an FHA loan.
VA Loans: seller concessions
VA Loans: For VA loans, seller concessions can cover a range of costs. They can pay for the buyer's closing costs, prepaid expenses, pay off debts, and even fund the VA funding fee. The VA puts a 4% cap on seller concessions, but this doesn't include traditional closing costs like the VA appraisal, credit report, loan processing fee, title insurance, and recording fees.
With a VA loan, the seller can contribute money to a variety of costs associated with the home buying process. Here's a list of what seller concessions can pay for:
Closing Costs: This can include loan origination fees, credit report fees, appraisal fees, discount points, title search and insurance, and recording fees.
Prepaid Expenses: These could include property taxes, homeowners insurance, and initial deposits into escrow.
VA Funding Fee: The VA charges a funding fee to most veterans who use the program, and this can be included in seller concessions.
Paying Off the Buyer's Debts: Unlike most other types of loans, VA loans allow seller concessions to be used to pay off loans, credit cards, or other debts of the buyer. This can help the buyer qualify for the loan by reducing their debt-to-income ratio.
Remember, while the VA allows sellers to contribute up to 4% of the purchase price towards the buyer's costs, this 4% cap does not include traditional closing costs. The 4% limit applies to additional concessions like paying off the buyer's debts or funding the VA funding fee.
Traditional closing costs, include fees for things like the loan origination, credit report, appraisal, title search, title insurance, and recording fees, are not included in this 4% limit. A seller can contribute to these costs without it counting towards the 4% cap.
Note, there is a reasonable limit to these contributions, which is typically determined by the actual amount of the closing costs. The contribution must be a legitimate cost associated with closing the transaction, and not a way to give the buyer cash back above the value of the home.
Conventional Loans: seller concessions
Conventional Loans: For conventional loans, seller concessions can be used for closing costs, prepaid expenses, and discount points. The maximum seller concession allowed varies based on the loan-to-value (LTV) ratio. For loans with an LTV of 90% or less, the maximum is 6%. For loans with an LTV greater than 90%, the maximum is 3%.
Conventional Loans: The limits on seller concessions vary based on the loan-to-value (LTV) ratio:
If the LTV is 75% or lower (meaning a down payment of 25% or more), the maximum seller concession is 9%.
If the LTV is between 75% and 90% (meaning a down payment between 10% and 24.99%), the maximum seller concession is 6%.
If the LTV is greater than 90% (meaning a down payment of less than 10%), the maximum seller concession is 3%.
With a conventional loan, seller concessions can be used to pay for a variety of closing costs and related expenses. These may include:
Origination Fees and Discount Points: These are costs related to creating the loan and optionally reducing the interest rate.
Third-party Charges: These charges come from parties other than the lender involved in the home buying process. Examples might include a fee for a credit report from a credit bureau, a fee for an appraisal from an appraisal company, or fees for a title search and title insurance from a title company.
Prepaid Expenses: These usually include homeowners' insurance premiums, property tax payments, and per diem prepaid interest that accrues on the loan between the closing date and the first mortgage payment.
Inspection Fees: Fees for home, radon, or pest inspections can also be covered.
Other Closing Costs: Other miscellaneous closing costs associated with the loan might be covered as well.
Note that seller concessions cannot be used for the down payment on a conventional loan.
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Please note that the exact use and limits of seller concessions can depend on the specifics of the loan agreement, current guidelines from loan programs, and other factors. It is important to discuss these details with a mortgage professional or a real estate attorney to understand the current regulations and how they apply to a specific situation.