Seller contributions or sales concessions can be a great help for prospective home buyers looking to purchase a new home. However there are limits based on the type of financing being used. FHA, VA, Conventional, or USDA limits how much a seller can pay as a contribution to the buyers closing costs and prepaid expenses.
The FHA guidelines are simple and straight forward and the same for all FHA loans. The seller can contribute up to 6% of the sales price or toward closing costs, prepaid expenses, discount points, and other financing concessions.
Not a simple as FHA, VA allows the seller may to contribute up to 4% of the sales price. VA rules say that the value of a seller concession can equal as much as 4 percent of the selling price. That’s in addition to “normal” discount points and payment of the buyer’s loan-related closing costs. Total contributions may exceed 4% because standard closing costs do not count toward the total.
The 4% guideline applies to items such as but not limited to:
- Prepayment of property taxes and insurance
- Appliances and other gifts from the builder
- Discount points above 2% of the loan amount
- Payoff of the buyer’s judgments and debts
- Payment of the VA funding fee
Example: Seller pays off a credit card with a balance of 4% of the sales price and also pays the standard closing costs associated with the loan totaling 2% of the sales price totaling 6% of the purchase price.
Conventional seller concessions are completely dependent on the LTV (loan to value). In other words, what is the percentage of the sales price is your down payment going to be.
Property Type Down Payment Max Seller-Paid’s
Primary Residence or Second Homes Less Than 10% 3%
Primary Residence or Second Homes 10% to 25% 6%
Primary Residence or Second Homes 25% or more 9%
Investment Property Any amount 2%
USDA mirrors the FHA guidelines with 6% allowable in seller concessions. USDA guidelines also adds that closing costs can’t exceed those charged to other applicants by the lender for similar transactions such as FHA mortgage loans.
Even if the buyer has the funds to pay all the closing costs associated with their purchase transaction. Cash is King. Most buyers spend on average $17,500 in upgrades and improvements on their new purchase. Why spend your cash reserves when you can use Seller-Paid-Contributions. They are the reason many real estate transactions are completed.