Seller concessions are a way to help close the gap between what you can afford and the seller’s asking price. When making an offer you can ask the seller to pay closing costs or they may agree to lower their asking price or both. If you’re considering buying a home with seller paid closing costs, this guide will answer your questions about what they are, how they work, and why they might be right for your situation this is the post for you.
What are seller-paid closing costs and how do they work?
Seller paid closing costs are the costs associated with buying a home that the seller pays for a buyer. They can be anything from an appraisal fee to a loan origination fee. In some cases, they can also include things like mortgage insurance or title insurance.
It’s important to note that seller-paid closing costs are only paid by the seller if they choose to pass them along in their offer. If they don’t, then the buyer will have to cover those fees out of pocket.
How can seller paid closing costs help you?
Seller paid closing costs are a great option for anyone looking to buy a home. When you’re purchasing a home, you will oftentimes be required to pay certain fees related to the transaction. These fees, called “closing costs,” vary depending on the value of the property and other factors such as whether it’s a cash sale or not. The seller usually pays some of these fees because they are more likely to have money available than buyers do who have spent all their savings on down payments. This means that homeowners can use seller-paid closing costs as an opportunity to reduce their monthly mortgage payment by lowering their interest rate or reducing their monthly payment altogether by paying off some of their outstanding balance early in the life of their loan
Are seller paid closing costs a good idea for you?
If you’re buying your first home and you don’t have the money to put down, seller-paid closing costs could be a good option. The more cash you can put towards a down payment, the better.
You should also consider seller-paid closing costs if there are renovations or repairs that need to be done before you move in. That way, whoever is selling the property will assume responsibility for those expenses and pass them on to you instead of forcing them on you later.
Conventional loans are the most common type of mortgage in the U.S., accounting for more than two-thirds of all residential mortgages. Unlike FHA loans and VA mortgages, which require no money down to purchase a property, conventional loans generally require that you make a down payment on your home purchase. Conventional Seller Concessions are based on the amount of down payment you are using and can go up to 9% depending on the amount you are putting down to purchase the home. If you’re buying an investment property, there is also a cap of 2% for seller concessions (you can find more details about this below).
Limits Based on Loan-To-Value
- If your down payment is less than 10%, the seller can contribute up to 3% of the closing costs
- If your down payment is 10 – 25%, the seller can contribute up to 6% in concessions
- If your down payment is more than 25%, the seller can contribute up to 9% in funds toward your closing costs.
- If you’re buying an investment property, the seller’s contribution is limited to 2%, no matter what your down payment is.
The VA loan program has been around since 1944, and its primary purpose is to provide homeownership opportunities for veterans. If you’re a veteran or active military member, you can qualify for a home loan with zero down payment and no monthly mortgage insurance.
Here’s what the Department of Veterans Affairs says about seller concessions:
“The seller can pay for some closing costs. Under our rules, a seller’s ‘concessions’ can’t exceed 4% of the loan. But only some types of costs fall under this 4% rule.
- payment of pre-paid closing costs,
- VA funding fee,
- The payoff of credit balances or judgments for the Veteran, and funds for temporary ‘buydowns.’
- Payment of discount points is not subject to the 4% limit.”
If the buyer’s loan amount was $400,000, the seller could give up to $16,000 (or 4% of the loan amount) for the specific things listed in the last paragraph.
Most of the time, the seller can cover all the other closing costs (i.e., those not mentioned above). Home appraisals, local taxes, and recording fees fall into this category. The 4% cap only applies to the costs listed in the quote above from the VA.
USDA loans have a seller concession limit of 6%. This means that the seller can pay up to 6% of your purchase price toward your closing costs.
FHA loans are considered “the best home loan program for first-time home buyers.” The FHA doesn’t, which makes it easier to qualify for a mortgage with a lower income. This can be especially beneficial to those who don’t have the cash or credit history to get approved for a conventional mortgage.
With FHA Loans the limit of a seller concession is 6% of the purchase price.
The lender can give you an estimate upfront of what your closing costs will be. This will help you prepare for how much to ask the seller for because it’s better to ask for a little more than you think it might cost and have your offer accepted than to lowball and end up having to pay more. The lender can also break down the costs by category, like “title insurance”, “home inspection” or “pre-paid interest,” which will help put those expenses into perspective.
Seller Concession Strategies
- Using the concession to simply reduce your cash to close. The seller/lender will accept a reduced price if you give up some of your cash to close, even if it is only $5k or so.
- Using the concession to reduce your interest rate. If you can get a lender to agree to lower the interest rate on your loan, this may be cheaper than paying for closing costs out of pocket (especially if you have good credit).
- Paying upfront private mortgage insurance (PMI) for conventional loans: PMI is an up-front fee charged by lenders when you take out a conventional loan with less than a 20% down payment. However, most people who seek conventional financing do not have enough savings set aside for a 20% down payment on their home purchase and therefore must pay Private Mortgage Insurance (PMI) until they save up enough money for their down payment or refinance with enough equity where they don’t have to pay PMI anymore If this sounds like something that might apply in your case, then consider paying off extra principal amounts over time instead so that eventually there won’t be anything left after all principal payments are made except the principal balance itself – which means no more PMI!
Closing costs can be a significant cost and one of the biggest hurdles in purchasing a home. Seller-paid closing costs can help you save money and get into your new home sooner.