The seller can pay up to 9% of your costs
The U.S. housing market is expanding. Fueled by low mortgage rates and the rising cost of rent, home sales are at decade-best levels and values have eclipsed last decade’s peak.
Plus, with an abundance of low- and no-downpayment mortgages; and the return of piggyback lending, there are fewer obstacles to homeownership for first-time and repeat buyers.
When you buy a home, though, you pay for more than just the house — there are closing costs to consider.
According to Bankrate.com's annual Closing Cost Survey, closing costs are down 7 percent as compared to last year; but, costs can still be quite high — especially if you’re finding yourself tight on cash for a down payment.
The good news is that, as a home buyer, your contract can stipulate that the seller of the home pay for any and all closing costs such that your closing cost obligation drops to zero.
The arrangement is known as “Seller Concessions” and it’s commonplace in today’s home purchase contracts.
Don’t want to pay closing costs? Ask the seller to pay them on your behalf.Verify your home buying eligibility (Jan 18th, 2020)
What are mortgage closing costs?
When you purchase a home using a mortgage, your lender is required to disclose all fees which you’ll incur as part of the transaction. These fees are known as “closing costs”.
By definition, closing costs are costs paid by a home buyer which would not be applicable in an all-cash transaction. However, the term is used in more general terms to include all of the costs associated with buying a home.
This can include lender fees such as a discount points, origination, and processing; and may also include settlement costs such as title search fees, attorney costs, and flood certifications.
The blanket term “closing costs” can also include fees assessed by state and local governments including transfer stamps, and other local taxes.
Closing costs vary from loan-to-loan because many fees are based on the exact amount of money borrowed. The more you borrow, in general, the higher your costs.
Closing costs also vary because lender fees are different from bank-to-bank, which is why you should always get more than one quote when shopping for a loan. Comparison shopping helps you save money.
According to Bankrate.com’s annual survey of closing costs, lender fees are down seven percent from last year, but still range between 1-2% of your overall purchase price.
However, in some states, such as New York, where attorneys’ fees can be expensive; and, in Chicago, where a 7.5 percent “real estate sales tax” exists, closing costs tend to outpace the 1-2% average nationwide.
As a buyer, finding money for a down payment and for closing costs can make purchasing a home cost-prohibitive.
Thankfully, there’s a “clean” way to get your closing costs paid. The solution is called Seller Concessions, and lenders have special places in their guidelines to allow for it to happen.
Using seller concessions to reduce loan closing costs
Seller concessions is a formal arrangement by which a home seller agrees to pay some, or all, of a buyer’s closing costs at the time of settlement.
Sometimes, seller concessions are referred to Interested Party Contributions (IPC), and sometimes they’re referred to as Seller Contributions or a Seller Assist.
Each terms mean the same thing — it’s a reference to when the buyer’s closing costs are paid by a party other than the buyer.
Such an arrangement is allowed on all major loan types, too, including conventional loans backed by Fannie Mae and Freddie Mac; FHA loans backed by the Federal Housing Administration; VA loans backed by the Department of Veterans Affairs; and, USDA loans backed the U.S. Department of Agriculture.
How seller concessions / IPCs work
Here’s how seller concessions work.
First, a home buyer and home seller reach agreement on a sales price for a home. It could be any price, so long as there’s agreement.
Then, the buyer and seller both agree to raise the sales price of home above its original level, with the seller agreeing to concede the entire “raised amount” toward the buyer’s closing costs at settlement.
Sometimes, seller concessions will cover all of a buyer’s cost. Other times, it will not. In no circumstance, however, may the amount of seller concessions exceed the amount of closing costs charged to the buyer.
The buyer cannot use seller concessions to get “cash back” at closing, or for any other purpose than to pay for closing costs shown on a settlement statement.
In addition, seller concession may not be used to compensate for home appliances or roofing in need of repairs; or, to make the buyer’s downpayment.
Seller concessions may only be used to offset buyer closing costs.
The limitations of the “seller assist”
That said, limitations exist for seller concessions.
One, as discussed, is that seller concessions may not exceed the sum of a buyer’s closing costs. Another is that the home’s “adjusted” sales price must be supported by the home loan appraisal.
A buyer’s request for seller concessions will be rejected if the home’s appraised value is below the adjusted sales price.
Lastly, you can’t request unlimited seller concessions. Depending on the buyer’s loan type, seller concessions are capped to a specific percentage of the loan size.
A conventional loan, for example, will allow up to 9% seller concessions for loans with a loan-to-value (LTV) of 75% or less; 6% seller concessions for loans with LTVs between 75 and 90%; and, 3% seller concessions for loans with an LTV over 90%.
Investment properties are capped to 2% of the purchase price.
FHA loans allow up to six percent in interested party contributions; VA loans allow up to 4% in interested party contributions; and, USDA loans allow up to six percent.
Seller contributions are allowed on jumbo loans, too. Limitations vary by bank.
What are today’s mortgage rates?
If you’re buying a home but don’t want to pay costs, Seller Concessions are a good way to reduce the amount you’ll need at your settlement. Once you’re under contract, your lender can help you plan for the steps.Verify your home buying eligibility (Jan 18th, 2020)