Using Seller Concessions When You Buy Your Home
.Seller concessions occur when an interested third party like a seller, real estate agent or lender contribute to the sale of a home to help pay your closing costs.
This is actually quite common and a great tool for helping home buyers reduce the burden of high closing costs.
Asking for Seller Concessions
Typically, in a buyer’s market you are far more likely to receive seller concessions than in a market where there are far more buyers in the market than there are sellers.
As a buyer, you are asking for seller concessions as part of your purchase offer.
While it is possible to receive seller concessions when making an offer on a short sale or foreclosure, it is less likely that you will be able to be competitive and get your offer accepted.
If you intend to ask for seller concessions, make sure you discuss this strategy with your real estate agent and your lenders so that you can still make a competitive offer and have a shot at getting your offer accepted.
Being Competitive When Asking for Concessions
Keep in mind that if you are asking the seller to contribute some of the proceeds from their sale back to you to help pay for closing costs, that it will affect the sales price and your ability to be competitive if there are many offers being submitted on the property.
If a seller is asking $200,000 for their home and you offer $200,000 and ask for 3% of the purchase price to be credited toward your closing costs, you’re actually only making an offer of $194,000 if the seller has to give you $6,000.
The amount of seller concessions you can ask for will vary depending on what type of financing you are using to purchase the home.
FHA Home Loan Seller Concession Guidelines
When buying a home using FHA financing, the seller and/or your mortgage lender or real estate agent may contribute up to six percent (6%) of the lesser of the property’s sales price or the appraised value toward the buyer’s closing costs, prepaid expenses, discount points and other financing concessions.
The six percent limit also includes
- third party payment for permanent and temporary interest rate buydowns, and other payment supplements
- payments of mortgage interest for fixed rate mortgages
- mortgage payment protection insurance, and
- payment of the upfront mortgage insurance premium (UFMIP).
Conventional Seller Concession Guidelines
Conventional guidelines use the term Interested Party Contribution (IPC) and differentiate between sales concessions and financing concessions.
Interested parties to a transaction include, but are not limited to, the property seller, the builder/ developer, the real estate agent or broker, or an affiliate who may benefit from the sale of the property and/or the sale of the property at the highest price possible.
Fannie Mae considers the following to be IPCs:
- Paid directly from the interested party to the borrower;
- From an interested party through a third-party organization, including nonprofit entities, to the borrower;
- Funds that flow to the transaction on the borrower’s behalf from an interested party, including a third-party organization or nonprofit agency; and
- Donated to a third party, which then provides the money to pay some or all of the closing costs for a specific transaction.
Fannie Mae does not permit IPCs to be used to make the borrower’s down payment, meet financial reserve requirements, or meet minimum borrower contribution requirements.
Allowable seller concessions for conventional loan programs are as follows
VA Loan Seller Concession Guidelines
VA loans also refer to seller concessions as Interested Party Contributions (IPC)
A maximum of 4% of the value of the property as indicated on the Notice of Value (NOV) may be contributed from an interested party (property seller concession) to be applied toward closing costs and/or prepaid items.
Concessions which exceeds 4% of the established reasonable value of the property is considered excessive and unacceptable for VA home loan. A reduction of the sales price in the amount equal to the excess is required in these instances.
Property seller concessions include, but are not limited to the following:
- Payment of the VA funding fee
- Prepayment of the veteran‟s property taxes and insurance
- Gifts such as a television set or microwave oven
- Payment of additional discount points to provide permanent interest rate buy downs
- Provision of escrowed funds to provide temporary interest rate buy downs
- Payoff of credit balances or judgments on behalf of the veteran
Preparing Your Strategy
Always consult your mortgage lender about the current guidelines for using seller concessions to help cover some of the costs of buying your new home.
After consulting your mortgage lender, talk to your real estate agent. These professionals will work come up with a strategy for asking for seller concessions when appropriate, while staying competitive and not hurting your chances of getting your offer accepted.