Having the seller pay some or all of your closing costs is common. Some buyers and their real estate agents have a hard time structuring these type of transactions. Below are FAQ's to help you understand the structuring needed for a purchase with seller concessions.
Clarifying Terms
When talking about this topic there will be many phrases thrown around that basically mean the same thing; seller concessions, seller paid closing costs, seller assistance, seller contributions, and more. For our purposes we will use the term seller concessions.
How much can I ask for in seller concessions?
Typically on conventional loans the most a buyer receives in seller concessions is 3% (On a $100,000 purchase, $3,000). Making a larger down payment can raise the amount of concessions allowed from 3% to 6% or even 9%. However you rarely see these high concession amounts because if a buyer is putting, for instance, 25% down on a home, they don't have the seller pay concessions for them. Not only that, but if you need 9% in concessions, something is usually wrong with your financing.
On FHA loans, you can receive up to 6% in concessions. (On $100,000 purchase price, $6,000) Typically the lower the purchase price the higher percentage of seller concessions you will need. It is not typical to have a $300,000 purchase price and need $18,000 in seller concessions. It is much more typical to see, for instance, a $60,000 purchase price and have $3,600 in concessions.
On USDA loans, there is no limit to the allowable seller concessions, other then it has to make sense. A buyer would not typically need a percentage of seller contributions over about 4-5%. There are some examples below of reasons why a high percentage of concessions would be needed.
How do I calculate the seller concessions?
Simply take the purchase price, and multiply it by the percent allowed for the type of loan. For example, a $100,000 purchase price with 3% concessions is $3,000, and 6% concessions is $6,000, etc. On a calculator, you would multiply 100,000 x .03 or .06 respectively.
What can seller concessions cover?
Seller concessions can cover your closing costs which may include mortgage related fees, title company fees, the set-up of an escrow account, your home owner's insurance costs, state taxes or stamps, and more. Many, but not all, home owner's insurance companies will allow you to pay the policy premium at settlement. If that is important to you find out upfront. Seller concessions CAN NOT be used for a down payment.
What is NOT Seller Concessions?
Grants are not seller concessions. Down-payment assistance programs are not seller concessions either.
For first time home buyers, a lender and real estate agent that work together closely can structure an offer to purchase a home where you can utilize both a grant to pay for all of your required downpayment, and seller concessions to cover all of your closing costs. It is not rocket science. You simply have to work with people that know what they are doing.
It is important for your lender and your real estate agent to convey approval terms BEFORE making an offer on a home. Any real estate agent worth your time would have a buyer pre-approved before submitting offers on a home. This being said, it is important that your real estate agent not only knows how much you can afford, but also the terms and conditions of your approval. Some pre-approvals are contingent on seller concessions and/or grants. This needs to be communicated to all parties up-front.
Am I paying more for a home if I use seller concessions?
Some people may look at their purchase of a home in this way; (Using round figures) I can pay $190,000 for a home and pay my own settlement costs of $10,000 I can pay $200,000 for a home and have the seller pay $10,000 of my settlement costs. Viewed this way you are actually financing the costs. You pay interest on $10,000 more, BUT you get to keep $10,000 in your pocket, which more importantly you can keep for a safety net (and earn interest from yourself).
SIDE NOTE: This aspect can not be over-emphasized. If your lender thinks it is "OK" to put you in a home where you have literally a few hundred dollars in the bank after settlement, you both are setting up for a VERY RISKY situation and one which could go into default very quickly. It is unwise to purchase a home after which you are immediately poor! It would do all home buyers well to consider this before purchasing a home. Hopefully you will have a lender or real estate agent who would care more about you in this fashion.
Ways to utilize seller concessions for your benefit
- Have some or all of your closing costs paid by the seller.
- As a first time home buyer utilize both a grant and seller concessions to cover your closing costs and down payment requirements.
- Create a financially safe environment by keeping more money in your pocket after settlement. This aspect is overlooked too often yet is very important to you as a home owner.
- Have the seller pay points for you. This will make your monthly mortgage payment lower by giving you a lower interest rate. In some cases this can be the deciding factor on if you qualify to buy a home. This will also lower your debt-to-income ratio, which is one of the major factors a lender looks at when approving a loan.
- Avoid private mortgage insurance (PMI). If you are a buyer that has the assets available to make a 20% down payment, but not enough assets to pay closing costs, then have the seller pay your closing costs. This will bring you to the 80% loan-to-value level and allow you to eliminate PMI. (NOTE: This is all negotiated when you make your offer on a home and agree to terms).
Conclusion
Seller concessions are an important part of home financing. Used correctly, seller concessions can save a buyer money, allow more financing options, and create a financially safe environment. Consider these important aspects prior to making an offer on a home and you will be much better off, both at settlement and in the long term.
If you have any questions about seller concessions or any other mortgage/real estate topic(s), feel free to contact Steve Kappre directly.
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Steve Kappre is a Mortgage Planner with Treasury Mortgage. Steve specializes in;
• All areas concerning First-Time Home Buyer Mortgages, grants, down payment assistance, police and fire loans, rehab loans, and more.
• Reverse Mortgages
• Equity Management strategies for high-end homes and high net worth individuals.
Contact Steve Kappre directly at 856-419-3561 or at www.stevekappre.com
Treasury Mortgage - 550 Bridgeton Pike, Mantua, NJ 08051 - 1810 Springdale Road, Cherry Hill, NJ 08003
Licensed by the NJ Department of Banking and Insurance
Treasury Mortgage - 550 Bridgeton Pike, Mantua, NJ 08051 - 1810 Springdale Road, Cherry Hill, NJ 08003
Licensed by the NJ Department of Banking and Insurance
I like to refer to seller concessions as "seller incentive". If the seller wants my buyer to buy their home, they will chip in some of their equity to help pay for the buyer's closing.
Of course, these days, fewer owners have any equity. Bank foreclosures are the best place to get closing.
Lenn - great terminology. Since I don't work with sellers per-say I never would have thought of it that way. Good stuff.
Fabulous job!
An aside to new agents: If you write "Seller to pay XXX towards buyers closing costs, pre-paid items and/or tax prorations" on the purchase offer you shouldn't have any problems later with undewriting coming back and saying "Closing costs are only YYY - that's all we'll allow."
Steve... what is a seller's concession? Having my mortgage payment be zero? Seriously, good job here. For some reason, realtors and or buyers are still confused by these terms. And as mentioned, some don't get it that you can just add it to the purchase price, if the home would appraise.
Hi Steve: Just a small clarification. VA is often lumped in with FHA as a 6% seller concession which is not correct. VA limits the seller concession to 4% plus normal closing costs and discount points. Let me give you an example:
John and Jane Doe buy a house for $100,000. There closing costs are $2,000 and they want to pay two points with their loan to get the lowest interest rate. In this situation the sales contract can be written for the borrowers to buy the house for $108,000 with the sellers paying $8,000. The two thousand in closing costs don't count and the $2,000 in discount points don't count (assuming 2 point loans are common in the area). Therefore they have a $4,000 credit which can be used for escrows, extra points, or the payoff of outstanding judgments and collection accounts (little know fact but I swear it's true - I've done it!). In this example the VA is allowing an 8% closing cost credit!
Hope this helps clarify.
:)
Steve, you did a really nice job explaining in very normal easy to understand terms and words! Nice Job!
Kris - THANKS for the add
Jeff - (Everyone else ignore this statement) Seller concessions is when the seller makes every other payment for you. It's only available in leap years though.
Matt - Great input - I revised my above statement. You are right. Basically VA will allow 4% PLUS a handful of other items too much to discuss here, but you are right about the collections. Little tidbits like that are the kind of info and knowledge that close loans for people making them homeowners instead of long time renters. Appreciate the add!
Jo - If I work hard to explain clearly it the first time I hopefully won't have to explain to 100 people later, haha. Thanks for the kind words.
Hi Steve: From my experience 6% always worked for VA because whenever the closing costs and "normal" discount points were backed out - what was left never exceeded 4%.
:)
Matt - Sound right.
Actually, that, "seller incentive" was simply an aside.
When I write a contract, I use the term, Seller Credit to Buyer $XXXX, and, as Kris wrote, we enumerate the items it can be, pre-paids, loan fees, closing costs, transfer and recordation, appraisal, title insurance, home inspection, AND any other costs permitted by lender. Remaining seller credit may be used for origination and discount points/fees.
I noticed the statement about VA closing but, since the article is focused on FHA, didn't mention it.
I still find it hard to believe that in parts of the country, agents and loan officers discourage the use of VA, FHA, USDA, etc. financing. Sad.
Lenn - Agents will find your comments very helpful. Thank you. As for FHA right now it is about 80%+ of the loans I write. I'd be out of business without it. And so would many agents!!
Hi Steve,
This post is excellent, and has a wealth of knowledge for any buyer/seller. Well done, and the comments look to be heating up the conversation. :)
-Lisa
Lisa - Thanks. And aren't the comments always the best part? WIth all the masterminds and experience here it can get really fun!
Thanks for the refresher!!
This is such great information for both buyers and sellers to have. Thanks for sharing, and now, I'm going to share it (with your permission, of course...)
Tammy - You are welcome
William - Any time - reblog it :) It is good info for all to have. I basically typed this because so many people ask me about it.
Hey Steve
Oh . . . oh, I got one! How 'bout seller to buy down buyers' pints oops . . . points.
After reading your post, it's only OBVIOUS -- duh -- how much John and Jane Q. Public need to hire a real estate agent to assist them with their home purchase and/or their home sale! YIKES!! I almost didn't understand it . . . ha ha ha
;-)
Very good explanation here. This can be so confusing to explain to sellers!
Carla - You are right - a little knowledge can go a really long way!!
Erica - You are right. I've been known to overcomplicate things sometimes, haha. But if they can read this on their own, sometimes that really helps (It also helps me since I can re-write over and over!)
Steve,
What a great post! This is not only a good reminder for an agent but also very useful information to give to buyers and sellers. Thank you for sharing your knowledge!
Laurie
Laurie - Right on. Like I said to Erica above, some topics come simply from having clients ask us the same questions over and over. Thanks for stopping by.
Steve this is a great tutorial post for buyers and sellers. Well written and very easy for even newbies to understand. Congrats on your feature. Well deserved!
Steve - very well explained! I like this thought of yours: "Create a financially safe environment by keeping more money in your pocket after settlement. This aspect is overlooked too often yet is very important to you as a home owner."
Very timely reeminder for the buyers to get a real approval and to work with the knowledgeable agent who knows how to structure the offer right.
This was great. I think more and more buyers are needing help to get into a property and seller concessions is certainly one of those venues. Well laid out and I will save for future reference.
Congrats on your feature. Thanks for the info, I was just explaining this to a new agent this afternoon.
Anna - Thank you! I hope maybe it could help your buyers/sellers.
Svetlana - That point can't be over emphasized. Just to have a few bucks in the bankkeeps their new dream home from becoming a nightmare.
An - Thank you!
Charlie - Great. Hope I helped!
IN CASE THIS WOULD HELP ANYONE, I RECEIVED THIS DIRECT E-MAIL. HERE IS THE QUESTION AND MY RESPONSE.
I really enjoyed reading your info on seller concessions. However can
you clarify even more for me the paragraph under the heading Am I Paying
More For A Home If I Use Seller Concessions found on the webpage link below?
I did not fully understand the two sentences in that paragraph that began
with "viewed this way...." I guess I was not clear on whether paying the
$190,000 would be better and I would actually get to keep the $10,000 or
vice versa? THANKS!
My Response: If it were a perfect world I'd say pay $190,000 for the purchase price of the home and pay the closing costs ($10,000) out of pocket. Doing it this way you do not need to "finance" the closing costs by paying $10,000 more for the home ($200,000).
The reality is most people need to have the closing costs paid for them by the seller, either because they just don't have the money, or because they want the money for something else (savings, furniture, dental work, whatever). One is not less attractive. It is just a personal preference or need.
Steve - Great post regarding seller assist or concessions. Very well laid out covering all the key points. So many folks (agents and consumers) get tripped up in explaining this. Will tweet this post as well !! ~ Chris
Steve... sounds great to me... where can I apply... ;o)
Chris - Thanks. Posts like this help me explain it in the future.
Jeff - Apply on my website at www.we-b-loanin.com
Steve great explanation, I just made one of these offer today.
Jennifer - Thanks. Many of us would indeed be at a great loss without these options!
Hi Steve -- WOW! Very insightful and informative article for buyers and sellers, and even agents, thanks!
good post. Especially the part about how important it is to consider RESERVES after closing. I've had to talk a few clients down from being dead-set on spending every penny of their savings for down payment. In the short term, it exposes them to a much higher risk of either being a slave to the mortgage or worse yet, defaulting. Not to mention that for every $1000 in additional money down, their payment will only lower by about $6 on a 30 year mortgage. And in states like Texas, you can't get back that money unless you have more than 20% equity (in a primary residence) or, of course, sell the house.
Add to this the fact that money is so cheap and rates are bound to go up, you might actually MAKE money over the long run if inflation were to kick in and rates were to increase. it just doesn't make sense to spend all of your money on down payment these days. Reserves are king. people are quite often shocked to hear a lender say that, especially because they assume that our job is to squeeze every dime out of them that we possibly can. it's more important to make a decision that takes both equity and reserves into consideration.
Chris - I'm glad I could help you and/or your clients.
John - It is good to hear when other mortgage advisors can truly help a client understand the importance of MONEY IN THE BANK! A side account/reserve account is king like cash is king.
Great explanation of seller concessions. Now Im going to re blog it so that I can direct some of my clients to it. Thanks!
Great clarity to a sometimes less than clear issue. I worked with real estate agents that didn't see ther true benefit of adjusting the sales price to include seller paid closing closts. By the way, I've had a couple of loans where the seller was offering to buydown the rate along with some closing costs.
Laura - Thanks! hope it helps you clients
IMF - we as professionals and/or clients can really overcomplicate concessions. Those sellers you speak of were wise, as well as educated. That goes a LONG way in this market.
Wow!!! Excellent article Steve. One of my co-workers and I were discussing this yesterday. You put it in a neat little package for us. Thanks!!! Great work.
Great clarity.
I would like to hear from some of the appraisers as to how this affects the appraisal. especially with the poor appraisails we are getting because of the AMS's.
Our MLS just added a place for seller concessions when we report the closing. I think that is important information to be reported accuratly.
I discuss seller concessions with most buyers. One part of that discussion is the increase in property taxes based on the higher price. They need to be aware of that too.
Another thing I stress is that a $100K offer is not the same to the seller as a $100K offer with $3000 seller concessions. Sometimes we have to add the concessions on top and make it a $103K offer.
Scott - Glad to help :)
Dennis - Our MLS had that section in it. From my experience with appraisers they subtract the concessions when comping it out. I'd still like to hear as well though. As far as adding concessions on top, my experience is it is best to go in that way then to amend, considering appraisal issues and/or spooking the seller. I usually works either way, but that one time might be a sale or no sale ;)
Great clarity.
I would like to hear from some of the appraisers as to how this affects the appraisal. especially with the poor appraisals we are getting because of the AMS's.
Our MLS just added a place for seller concessions when we report the closing. I think that is important information to be reported accurately.
I discuss seller concessions with most buyers. One part of that discussion is the increase in property taxes based on the higher price. They need to be aware of that too.
Another thing I stress is that a $100K offer is not the same to the seller as a $100K offer with $3000 seller concessions. Sometimes we have to add the concessions on top and make it a $103K offer.
Your point is well taken in terms of trying to keep a loan down to 80% to avoid PMI and paying your own closing cost if you can.
I had a buyer want to put down 14% (all they had) and get the seller to pay. I told them put 3.5% down, pay their own closing and keep the price of the home down; and save the balance as a cash reserve.
Congratulations of Feature post! Excellent information, and you explained it so nicely! Great refresher for all of us, and buyers & sellers also. thx again!
Informative and well written. 5 stars *****
Steve, Thanks for the article. I really enjoyed reading it and will check out your other blogs. Keep teaching, we are listening.
Great info Steve - This is well laid out & easy to understand.
Best,
Dan
I enjoyed what you had to say! Very informative and easy to understand.
Great info - thanks for giving me something good to re-blog
Good stuff... I reblogged this as well... hopefully it will go a long way to explaining this aspect of a transaction to both Buyers and Sellers.
Having the seller pay closing costs makes it easier for my clients to focus on getting that down-payment money. I also do not have to worry about surprises at the end. Where some small item may have been forgotten. There is money on the table to take care of the small issues.
Great job with this article Steve. Nice to here you are numero uno as well!
Gene - good advice indeed
Ginger - You are welcome
Doyle - I appreciate your encouragement very much, thank you
Dan - Thanks
Team Honeycutt - thanks a million
Bridget - thanks for reblogging!
RI - I hope it helps your clients indeed
Al - Well said and very true
Bill - Thanks for the kind words. Somewhere in the mix od it all I owe some things to you.:)
Very timely reeminder for the buyers to get a real approval and to work with the knowledgeable agent who knows how to structure the offer right.
Moveable - It always pays to work with someone knowledgable!
Thank you for a great explanation on seller concessions!
Sharon - You are welcome
STEVE- GREAT JOB!
Have the seller pay points for you. This is key!
Permanent Buydowns are a great way to go if you anticipate being in a property for more than 5-7 years. BUT- the FTHB's who will be moving up within 5 years REALLY appreciate the substantial upfront savings of the 2-1 Temporary Buydown.
Thanks again for informing the masses!
Barbara - That is certainly a way to do it - and sometimes the only way for certain buyers!
Great article, and love your domain name! Very creative.
Steve, thank you for the very informative article. I am new in the business and just received an offer on one of my listings asking for a concession. This clarifies things quite a bit.
I have no qualms about paying incentives to Buyer's if the deal is mutually agreed! Thanks for sharing this!
Mark - That's great to hear!
Mindy - welcome
Steve,
Thank you for writing wuch an informative piece. You are a very gifted writer and crredit to our industry. I learn something every time. Keep up the good work.
John Chaump
John@JohnChaump.com
John - Thank you for your kind words!