Seller Paid Contributions Can Help Pay Closing Costs
July 13th, 2017
July 13th, 2017
You want to purchase a home, but you need help with your closing costs. Did you know seller contributions can help you reduce your financial burden at closing?
What Are Seller Paid Contributions?
Seller contributions are closing costs paid by the home seller – often in lieu of a price reduction. Seller paid contributions are also known as sales concessions or seller credits. They help the seller sell their home faster and you pay your closing costs – especially when closing costs can range from 2% to 5% of the home’s purchase price. However, contributions from the seller are limited.
Who Can Make Seller Paid Contributions?
Seller paid contributions are also known as interested party contributions (IPCs). These contributions can be made by other interested parties, like your real estate agent or a home builder, not just the home seller. An interested party is anyone who can benefit from the sale of the home. Even funds from down payment assistance programs can also be considered IPCs if the funds originate from the seller and run through a non-profit organization.
What Are the Limitations on Seller Contributions?
Sellers are limited when it comes to how much they can pay for. The specific amount depends on the type of mortgage loan you get, such as conventional, FHA, VA, or USDA. Each loan type has different rules for seller concessions.
Conventional Mortgage Loans – Maximum Seller Contributions
A conventional mortgage loan is not insured or guaranteed by the U.S. government. Guidelines for conventional loans are determined by Fannie Mae and Freddie Mac. Seller paid costs are capped for conventional loans. However, the limits are generous.
FHA Mortgage Loan – Maximum Seller Contributions
Therefore, if you’re purchasing a home for $250,000 with a 10% down payment, you could receive up to $15,000 in closing cost assistance (6% of the sales price) from the seller. However, you should realize most sellers aren’t likely to be willing to contribute that much. So, these maximum limits usually aren’t a factor in most cases.
An FHA loan is backed by the Federal Housing Administration. For an FHA loan, the seller can contribute up to 6% of the sales price for use toward closing costs, prepaid expenses and discount points. If the appraised value of the home is less than the purchase price, the seller may contribute 6% of the value.
VA Mortgage Loan – Maximum Seller Contributions
A VA loan is backed by the Department of Veteran Affairs. For VA loans, a seller may fund up to 4% of the sale price, as well as any reasonable and customary loan costs. In other words, there’s no limit on payment of the buyer’s closing costs and “normal” discount points. However, anything that’s considered non-customary has a 4% limit. Non-customary items include:
- Payoff of buyer’s debt, collections, and judgments.
- Prepayment of property taxes and insurance.
- Payment of extra points for a permanent interest rate buydown.
- Payment of the buyer’s VA funding fee.
- Gifts, such as appliances.
For example, a seller could pay for 2% of the purchase price for closing costs to cover the appraisal, loan origination and title fees. In addition, the seller could agree to pay 3% of the sales price to help the buyer prepay credit card debt, property taxes, insurance, and the VA funding fee. This 5% contribution is allowed since 2% goes toward closing costs and 3% goes toward non-customary items.
USDA Mortgage Loan – Maximum Seller Contributions
USDA loans are backed by the U.S. Department of Agriculture. For USDA loans, the seller may pay for up to 6% of the sales price toward closing costs.
Why Set Maximum Seller Contributions?
These limitations help keep the housing market fair. Plus, they keep home values and prices reasonable. Otherwise, unscrupulous sellers can inflate home prices and bribe appraisers to raise the value of the home. Not only would you pay too much for the home, but the loan wouldn’t be based on the true value of the home. And other homes in the neighborhood may start selling at inflated costs, too. Eventually, property values and loan amounts will be at unrealistic levels for your area.
Can the Seller Contribute More than the Actual Closing Costs?
No. The seller can only contribute the lesser of: 1) The maximum seller contributions for the loan type; OR 2) The actual closing costs.
For example, let’s say you have $5,000 in closing costs and the maximum seller contribution amount for your loan is $10,000. The most the seller can contribute is $5,000 even though the seller contribution is higher.
Additionally, the seller contributions can’t be used to help pay your down payment or reduce your loan principal. And you can’t receive the difference between the actual closing cost amount and the maximum seller contribution.
Are There Other Ways to Use Excess Seller Contributions?
Let’s say your closing costs are $5,000, but the seller is willing to contribute $7,000.
- FHA Loan. The seller can pay for your upfront mortgage insurance payment, which is 1.75% of the loan amount. However, the entire fee must be paid by the seller. If the excess seller contribution doesn’t cover the full amount, you can’t use the funds to pay this fee.
- VA Loan. The seller can pay all or part of the VA funding fee, which typically between 2.15% to 3.3% of the loan amount. However, the fee does count toward the VA’s 4% maximum contribution rule.
- USDA Loan. The seller can pay all the USDA upfront guarantee fee, which is 2% of the loan amount.
How Do I Determine What Mortgage Loan to Get and What the Seller Contributions Will Be?
Seller contributions can help you become a homeowner by reducing the amount of money you must pay in closing costs. To determine the best loan option based on your situation, contact the mortgage specialists at Grandview Lending (located in Indianapolis). As a mortgage broker, we have access to more national and regional lenders, so they can provide more loan options in comparison to your local bank. Depending on the loan, our mortgage experts can find out exactly how much your closing costs will be and how much the seller can contribute toward closing. Then talk to your real estate agent to find out if the seller is willing to pay for concessions.
Seller contributions are well worth the effort, helping you save money. Call Grandview Lending at 317.255.0062 or 866.690.4920 to get the loan process started.
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