SELLER CONCESSIONS: ONE WAY TO SAVE A TRANSACTION
Seller-paid concessions, when used properly, can mean the difference between closing a home sale and losing one.
A concession is anything of value added to the transaction by the seller, builder, developer, salesperson or any interested party. A concession may also include any closing costs that would normally be paid by the buyer or cash given to the buyer to lower non-housing debts. Funds received from a relative to assist with a home purchase, or cash contributed from an employer as part of a corporate transfer are not considered seller concessions.
When buyers and sellers are negotiating, a few hundred dollars one way or the other can make a huge difference. However, it's important for sellers to understand how concessions work and how nonallowable concessions can work against buyers.
From the seller's perspective, there may be little difference in offering a monetary concession or lowering the property price. Either choice reduces the net gain realized at closing. However, buyers may have another view of concessions versus lower prices. To a buyer, the concession may be more preferable, because it is money that can be applied directly to the purchase. In addition, making a concession rather than cutting the price helps maintain property values in the area.
It's important knowing which seller concessions are allowable by lenders. If a concession is considered nonallowable, the lender may reduce the home price by the value of the concession. This, in turn, lowers the maximum loan the lender will make, and could foil the transaction.
The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), which purchase residential loans from lenders, have restrictions concerning allowable seller concessions for conventional mortgages. Both entities permit sellers to pay some or all closing costs, depending on the down payment and type of financing involved. The closing costs sellers may pay include: fees for the loan origination, discount points, credit report, appraisal, title insurance, survey, loan underwriting, tax service, document preparation, deed recording, home inspection and loan assumption. (Allowable closing costs may vary by area.)
Sellers also are allowed to pay private mortgage insurance out of the buyer's "prepaid" costs collected at closing.
Fannie Mae and Freddie Mac also limit the amount of money sellers can give as concessions. The maximum contribution for conventional loans is 3 percent of the lesser of the sales price or appraised value, if the buyer's down payment is less than 10 percent and the property is to be occupied as a principal residence. The maximum allowable contribution is raised to 6 percent if the down payment is 10 percent or more. A contribution of 2 percent is permitted if the property will be used as investment property and the mortgage is a fixed-rate loan.
Few seller concessions are permitted in transactions involving single-family mortgages insured by the Federal Housing Administration (FHA). Sellers are allowed to pay up to six discount points (one point equals 1 percent of the loan amount); but other concessions may cause the buyer's down payment to be increased.
The Department of Veterans Affairs (DVA) is more lenient in its treatment of seller contributions. Under its home loan guaranty program, a seller is allowed to pay all closing costs, plus up to 4 percent of the sales price, to reduce other costs paid by the buyer. The 4 percent limit includes the VA funding fee, prepaid and escrow costs, discount points and payment of any debt to help the borrower qualify for the mortgage.