The other day, one of my realtor friends called and asked if they should suggest that one of their sellers offer financial concessions to help sell the house. An interested buyer had the money for the down payment, but not enough funds to cover the costs & prepaids.
Of course, my answer wasn’t a simple “yes” or “no”…few of my answers ever are. But at the end of the day, if the seller is looking to close that sale ASAP, then Seller Concessions can be a beneficial utility.
What are Seller Concessions?
When used properly, Seller Concessions can be the difference between closing a home sale and losing one. Concessions are a set dollar amount that the seller can put toward the buyer’s closing costs & prepaids. As with anything, there are rules to follow:
- Seller is permitted to contribute a specific percentage of the purchase price to the closing costs.
- Concessions can ONLY be put toward Hard Costs and Soft Costs (see my blog on Funds to Close for an explanation of these costs).
- Concessions CANNOT be used to cover down payment – that would be an inducement to sell. However, that doesn’t mean that you can’t receive gifts from relatives or close friends to put toward your down payment.
When it comes to the home-buying process, my team coaches clients to expect four out-of-pocket Money Milestones: Earnest Money, which is offered in good faith to show that the buyer is serious; Home Inspection, which isn’t necessary but encouraged; Appraisal fees; and Funds to Close. That last one is always going to impact a buyer’s ability to close on a house, which is why they might ask the seller to pay certain costs on their behalf.
Sellers can provide credits for the buyer. And sometimes it certainly helps the buyer out of a jam if they are short on funds to close the transaction. For buyers who do have enough money, having the seller cover those costs would allow them to put more on the down payment, thus lowering, or potentially eliminating, the need for private mortgage insurance (PMI). If a buyer is unable to fund a 20% down payment using a conventional mortgage loan, they will have a monthly premium (PMI) as part of their total housing payment. That premium decreases with every 5% increment paid on the down payment, and goes away entirely if the buyer has a 20% down payment.
The maximum amount of seller concessions (aka – seller credits) differs by loan type:
- FHA: 6%
- USDA: 6%
- Conventional: 3% to 6%
- Veterans Affairs (VA): 4%
It’s important to note that these caps may not allow the seller to pay for all of the buyer’s costs. The buyer should be prepared to cover the remaining funds to close as necessary.
In my next few blogs, I’ll be taking a look at each of these loan types to help you determine which is best for your situation.
Talk again soon…