Sellers Concession To Cover Closing Costs For Homebuyers

by Gustan Cho

Sellers Concession concession by the home seller can be used to cover closing costs. This way, the only costs the homebuyer needs to come up with is the down payment. It will not cost the seller anything by giving seller concession to homebuyers. The seller will just tack on the amount of seller concession to the price of the home. In most cases, homebuyers only have to come up with the down payment on a home purchase. Closing costs are normally paid with seller concession and/or lender credit.

How Much Do I Need To Buy A House And What Are The Costs?

There are two types of costs involved when purchasing a home. The down payment and closing costs.

There are two types of costs involved when purchasing a home. The down payment and closing costs. The down payment is a fixed percentage of the home price. The amount of the down payment required depends on the home mortgage program.

FHA Down Payment Requirements

HUD requires a 3.5% down payment on a home purchase FHA loan if the borrower has at least a 580 credit score. HUD requires a 10% versus a 3.5% down payment on a home purchase FHA loan if the borrower has under 580 credit scores and down to a 500 FICO. Fannie Mae and Freddie Mac require a 3% down payment for first-time homebuyers and a 5% down payment for seasoned homebuyers.

What Is The Minimum Down Payment To Buy A House?

Per Fannie Mae and Freddie Mac agency guidelines, a first-time homebuyer is defined as a homebuyer who had no ownership of a home in the past three years. VA and USDA loans do not require any down payment on a home purchase. Lenders offer 100% financing on VA and USDA loans due to the government guarantee. The down payment is a fixed percentage of the home purchase price.

Using Gift Funds For The Down Payment And Closing Costs On A Home Purchase

The down payment needs to be sourced and documented. Gift funds are allowed for the down payment on a home purchase. Now, all home purchase and refinance mortgage transactions have closing costs. Closing costs are not a fixed amount. Closing costs vary depending on each individual transaction. Most of our borrowers at Capital Lending Network, Inc. do not have to worry about paying for closing costs from their own pocket. Closing costs are covered with seller concession by the home sellers.

What Is Sellers Concession And How Does It Work?

A seller concession is when a home seller will give homebuyers a credit towards closing costs. Nothing in the mortgage business is free. So here is how home sellers give seller concessions to a homebuyer. Let’s take a case scenario situation.

Case Scenario Of A Seller Giving Homebuyer Sellers Concession

Let’s say a home seller wants $100,000 for his home. That is the bottom line price he will take. So, to help the home sell faster and help out the homebuyer, the seller will give the buyer a 6% seller concession or 6% which is the maximum allowed on FHA loans. Therefore, the home seller will sell the home for $106,000 and give the homebuyer a $6,000 seller concession towards the buyer’s closing costs.

Sellers Concession Overages Need To Go Back To Seller

The homebuyer will most likely have more than enough to cover all of his closing costs. The only costs the homebuyer needs to worry about is the down payment. If you have leftover seller concession, the seller is prohibited to give homebuyers a cash credit. Any leftover funds from seller concessions need to go back to the home seller.

What Is The Maximum Sellers Concession Allowed

The maximum amount of credit given to homebuyers depends on the mortgage program.

The maximum amount of credit given to homebuyers depends on the mortgage program. This is perfectly legal and is a great strategy to use by homebuyers so they do not have to come up with closing costs out of pocket. Sellers’ concessions can only be used for closing costs. It cannot be used for the down payment on a home purchase. The down payment needs to come from the homebuyer’s own funds. The down payment can be gifted.

Here are the maximum seller concession allowed:

  • HUD, the parent of FHA, allows up to a 6% sellers concession on FHA loans
  • VA loans have a maximum 4% seller concession limit by sellers to contribute to homebuyers closing costs
  • USDA allows a maximum of a 6% sellers concession for closing costs on USDA loans
  • Fannie Mae and Freddie Mac allow a maximum of a 3% seller concession on owner-occupant conventional loans
  • On investment conventional loans, the maximum seller concession allowed is 2% by home sellers

Sellers’ concession on non-QM loans depends on the lender. Most non-QM lenders will allow up to a 6% seller concession towards closing costs non-QM and alternative finance loan programs.

How Much Are Closing Costs On Home Purchase Transactions

Closing costs vary depending on the type of loan, type of property, location of the property, and other factors. Here are examples of common closing costs borrowers can incur on a home purchase transaction:

  • Origination fees and charges
  • Discount points
  • Credit report fees
  • Home inspection fees
  • Appraisal fees
  • Attorneys fees
  • Title charges
  • Recording fees
  • Transfer stamps
  • Mortgage insurance
  • Pre-paid
  • One year homeowners insurance premium

Any other costs and/or fees that are incurred by the homebuyer in closing the home purchase real estate transaction are considered closing costs.

Don’t Waste Any Of The Funds From Sellers Concession

Make sure to negotiate the seller’s concession when negotiating a home purchase. As mentioned earlier, make sure your loan officer uses up all of the seller concession. You cannot have overage on seller concession. If there are overages in seller concessions, the proceeds need to go back to the home seller. Any overages in seller concessions should be used to buy the rate down with discount points.

Getting Seller Concessions During Booming Housing Market

Homebuyers getting seller concessions was typically the norm for nearly a decade. However, during a booming housing market, sellers normally did not want to offer seller concessions. The past year has been a crazy housing market. Home prices were skyrocketing.

Housing Shortage Creating Problems In Getting Seller Concessions By Sellers

The shortage of homes and the demand of buyers created a frenzy of bids on a home the minute it was listed. Many homebuyers were offering over the list price. In cases where a buyer buys a home over list price, they need to come up with the cash difference of the appraised value and the purchase price. Lenders will only go by the loan to value based on the appraised value and not the purchase price. Homebuyers who could not get a seller concession from home sellers needed to come up with the closing costs. Closing costs can be gifted from family members or the lender can offer lender credit in lieu of a higher rate.

How Much Down Payment And Closing Costs Do I Need To Buy A House?

There are two types of costs on home purchase:

  1. Down Payment
  2. Closing Costs

The down payment is required by all home buyers on a home purchase. Most buyers do not have to worry about closing costs. Closing costs can be covered with the following:

  • Sellers Concessions by home sellers towards buyers closing costs
  • Lender Credit by the mortgage company in lieu of higher mortgage rate

In this article, we will discuss and cover seller concession overage mortgage guidelines on home purchases.

How To Cover Closing Costs With Seller Concessions

Home Buyers with only the down payment and to offset closing costs often request seller concessions towards closing costs. Most sellers will offer seller concessions. The realtors will negotiate the seller concessions when they negotiate the real estate purchase contract. Seller concessions, or sellers contributions, is a dollar amount that a property seller will give a home buyer towards the buyer’s closing costs.

Buyers Cannot Have Seller Concession Overages

If you do not use up all of the seller concessions and have a seller concession overage, then the leftover proceeds go back to the seller and not the buyer. It is illegal for homebuyers to keep any overage in seller concessions. Any overage needs to go back to the home seller.

Kickbacks Are Not Allowed With Overages

Giving the leftover seller concessions to the home buyer is known as a kickback and it is not allowed.

Giving the leftover seller concessions to the home buyer is known as a kickback and it is not allowed. The Federal Housing Administration (FHA) allows up to 6% seller concessions for FHA-insured mortgage loans, Conventional mortgage loans allow up to a 3% seller concession towards a buyer’s closing costs on owner-occupant properties. Conventional Loans allow 2% seller concessions on investment property financing. VA Loans allow up to 4% seller concessions. USDA allows up to 6%. Seller concessions can only be used for closing costs and not towards the down payment.

Typical Closing Costs

Closing costs are the following:

  • title charges
  • attorneys fees
  • transfer stamps
  • transfer taxes
  • homeowners insurance
  • other costs and fees associated with closing the loan
  • Seller concession overage cannot be used towards the down payment

Any seller concession overage needs to go back to the seller.

Do Not Waste Sellers Concession Overages

If borrowers have seller concessions overage, the loan officer needs to use it for additional closing costs such as the following:

  • Buying down the rate
  • Paying upfront mortgage insurance upfront and not rolling into the loan

Can You Use Sellers Concession Overage For Cash To Close: Closing Costs

Homebuyers will be required to come up with the down payment and closing costs on a home purchase. The down payment funds are normally 3.5% down payment for FHA loans. 3% to 5% down payment for conventional mortgage loans. No down payment requirement on VA loans and USDA loans.

Closing Costs Varies Depending On Multiple Factors

On top of the down payment, there are closing costs. Closing costs vary depending on the county and the state the property is at. Closing costs can range anywhere from 2% to 5% or more. Most sellers have no problem giving a sellers concession to a home buyer

Let’s take a case scenario:

  • Say a home seller wants a bottom-line net price of $100,000 and not a dime less

The home buyer is requesting a 6% seller concession since it is an FHA-insured mortgage loan.

How Do Sellers Concessions Work?

What the seller will do is raise the purchase price to $106,000. The sellers of the property will give the homebuyer a $6,000 seller concession towards the buyer closing costs where the homebuyer only needs to come up with the down payment.

Seller concessions can be used for prepaid as well:

  • Two months property tax escrows
  • Two months of homeowners insurance escrows as well as paying the one-year homeowner’s insurance premium

What happens if there is a seller concession overage?

Sellers Concession Overage And How It Works

As mentioned earlier, seller concession overage cannot go to the home buyer. If all of the funds cannot be used for closing costs, it goes back to the seller. It needs to go back to the seller. However, if there is a seller concession overage, borrowers do not want to waste it. Many times when I run into a seller concession overage, I use the excess funds to buy down the mortgage loan borrower’s mortgage rates. Loan Officers normally advise buying down mortgage rates by paying points. Paying down the rate by paying points is part of closing costs. Borrowers can also use it for paying upfront FHA Mortgage Insurance Premium instead of rolling the FHA MIP into the balance of their FHA Loan.

Home Buyers who need to qualify for a mortgage with a lender with no mortgage overlays can contact us at CLN Mortgage at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Capital Lending Network is available 7 days a week, evenings, weekends, and holidays.

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4 comments

Kimberly Maloney December 1, 2020 - 1:35 am

I have a few questions that i need to have answered prior to applying for a loan. The loan amount may vary, as the amount provided on this application is a guesstimate. I have seen nothing but great reviews about Gustan Cho Associates and Capital Lending Network, Inc.

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Michelle Kelly December 4, 2020 - 4:39 am

Hello, I was previously pre approved with a lender for a VHDA FHA Mortgage with a down payment grant and MCC tax credit.
I wanted to know if you provide those type of loans and or are familiar with it, if so what would be the next step.
thank you

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Kathleen Park December 4, 2020 - 4:41 am

We have a property in KY that we are under contract with and a home in CA we will be selling next spring. We filed a ch 7 bankruptcy this year, which precludes our ability to qualify for conventional financing. OUr equity in the CA home will be more than 1/2 the cost of the property at 700 Casey Fork Rd, Burkesville, KY. Purchase Price: $299K with $30K available for down payment. We are praying for our miracle loan out there somewhere!
Please call us at 916-600-4803
CA property: 5150 Baldwin Street valley Springs CA 95252
Current loan: $305K. Value $550K

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Penny Jackson December 4, 2020 - 4:42 am

Unfortunately due to unforeseen circumstances and student loan debt, I am currently in a chapter 13 bankruptcy. I just passed the 2 year mark. I should be done November 2021. My fiancé did try to purchase a home on his own about 2 years ago, unfortunately because it was based solely on his income that fell through. I am wondering what are options are, and if it is even possible for me to purchase a home during this time.

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