Closing costs don’t come cheap. They average $4,876 on a $271,363 home per ClosingCorp. Still, you don’t have to pay some or all of these closing costs. Enter seller concessions.
A legitimate arrangement between a seller and a buyer, seller concessions work with mortgages. Not only do buyers get help in their upfront homeownership costs, sellers too get to close the transaction faster.
How do seller concessions work? Let’s find out below.
What Are Seller Concessions?
Seller concessions, interested party contributions, seller contributions, seller assist. They all mean the same thing and relate to the incentives the seller offers to the buyer.
These seller incentives are not available in all-cash sales transactions. They are more prevalent in mortgage-financed purchases where closing costs can be hefty, as noted above.
Under FHA, VA, or Fannie Mae rules, the seller is not allowed to give the buyer funds for down payment or closing costs. This gift funding is reserved for people, e.g. loved ones who are not a party to the sale.
But the seller, in its capacity as an interested party to the transaction, is allowed under the loan programs to contribute toward the buyer’s closing costs. Of course, each program has a limit on these seller concessions.
What Goes in Your Closing Costs?
Closing costs are a handful of fees and charges required to close the sale transaction. They vary from loan to loan (for example, VA loans have a list of allowed closing costs), lender to lender but they include and are not limited to:
- Loan costs cover the costs of processing and underwriting the mortgage. Examples are (a) mortgage origination fees that cost 0.5% to 1% of the loan, (b) application fee, (c) discount points equal to 1% of the loan, (d) prepaid interest for interest that accrued within closing to the date of the first mortgage payment, (e) appraisal fee to size up the home’s market value and ensure that it is priced correctly, (f) credit report fee for pulling one’s credit report, and (g) mortgage insurance for conventional loans with less than 20% down payment or mortgage insurance premiums on FHA loans and guarantee fees on USDA loans. VA loans don’t have a mortgage insurance but have a one-time, upfront funding fee.
- Title charges cover the costs of ensuring and insuring that the title is free and clear of any unpaid mortgage debts or taxes. There is a separate fee for title search and title insurance. Attorney and notary fees are also included.
- Property recording and transfer fees. Depending on local state practices and governments, these fees refer to the recording of the sale transaction in public records and real estate transfer taxes.
- Settlement charges. Paint inspection, pest inspection, survey fees and any other terms set forth to close the transaction.
How Can Seller Concessions Help You
Against this backdrop, sellers can lend a hand in the closing costs. Seller concessions make it possible for a party other than the buyer to pay for his/her closing costs.
The buyer and seller can negotiate to raise the sales price with the raised amount going to the closing costs. But, the inflated sales price must match the appraised value of the home.
Seller concessions must not exceed the closing costs of the buyer. They can cover a portion or all of the closing costs, depending on the limits set by the loan program:
- FHA loans: 6% of the purchase price
- Agency loans sold to Fannie Mae/Freddie Mac: ranging from 3% to 9% (the higher the LTV, the lower seller concessions allowed)
- VA loans: up to 4%
- USDA loans: 6%
Let’s all be clear that these incentives are meant for closing costs only and not for any other purpose, e.g. for the buyer to get cash back at closing.
Ask your lender about using seller concessions toward your closing costs.Click to See the Latest Mortgage Rates»