Conventional Loan Seller Concessions

How much money can the seller pay toward your closing costs?

Money on a tableSome refer to it as seller assistance, while others refer to it as seller paid closing expenses; the terms are interchangeable.

Lenders refer to concessions as “interested party contributions.”

How Do Seller Concessions Work?

The mortgage programs allow the home seller to pay a percentage of the buyer's closing costs and prepaid expenses. The maximum seller concession amount is determined by the conventional loan program and down payment percentage.

Seller concessions are not automatic. The amount of the seller concession must be written into the sales contract and accepted by the seller. The concession can be expressed as a specific dollar amount or as a percentage.

Maximum Seller Concessions for a Conventional Loan

The following are the maximum allowable percentages for seller concessions:

Occupancy Type Down payment Seller assistance
Principal residence or second home 3% to 9.99% 3%
  10% – 24.99% 6%
25% or greater 9%
Investment property all percentages 2%

To qualify for conventional loans, borrowers must meet the requirements of Fannie Mae and Freddie Mac (Freddie Mac).

Interest parties such as the property seller, the real estate agent/broker, or an affiliate that stands to benefit from a property's sale might request concessions from Fannie Mae and Freddie Mac.

Lenders and employers are not considered interested parties in a sales transaction unless they are the property seller or have a relationship to the property seller or another transaction party.

The seller concession may not be used to cover the down payment!

Seller concessions may not be used to finance the borrower's down payment, meet financial reserve requirements, or meet borrower contribution minimums in order to meet the minimum borrower contribution standards.

Should I ask the seller for closing costs assistance?

A question that is often asked by home buyers is whether to negotiate a reduced sales price or request closing cost assistance.

Column A illustrates a purchase in which the seller pays 6% of the home buyer's expenditures with a full price offer.

Column B is a straight sale of $94,000 with no seller paid costs.

Clearly, the seller-paid closing cost option reduces the amount of money required at settlement to $3,500, but at the penalty of a higher monthly payment.

Column B displays a lower sales price without seller assistance; although the cash needed is much more, the monthly payment is also lower due to the smaller mortgage amount.

  A B
Sales price $100,000 $94,000
     
Closing costs 3,500 3,500
Prepaid costs 2,500 2,500
SUB-TOTAL $106,000 $100,000
Less seller paid costs 6% $6,000 - 0 -
Down payment (3.5%) $3,500 $3,500
Cash at settlement $3,500 $9,500
     
Interest rate/30 year term 4% 4%
 
Monthly payment $506 $449 $57

Mortgage Lender Incentives

Cash or cash-equivalent Incentives for All Transaction Types: The lender may give the borrower a cash or cash-like incentive (e.g., a gift card) that is not shown on the settlement statement, provided that the lender follows certain guidelines.

The incentive does not exceed $500 in value, and there is no requirement to repay the money.

Because the lender is not normally a party to the sales transaction, these types of lender incentives are not considered interest party contributions (IPC) and are therefore excluded from the interest party contributions limit calculation.

Additionally, since these monetary incentives are not deemed paid out to the borrower, they are not required to be included in the cash returned to the borrower at closing.

Rotating question markFAQs About Seller Concessions

Q. Are seller concessions a good idea?

A. A seller concession can reduce the amount of money at settlement, but, the mortgage payment will increase because you are building the seller assistance into the sales price.

Q. Are sellers willing to accept concessions?

A. Sellers are more willing to accept a seller concession if they get their desired net amount.

Q. How much does a seller have to pay?

A. The home seller is not required to pay closing and or prepaid costs on behalf of the home buyer.

Q, Who pays closing costs?

A. The home buyer typically pays the closing costs.

Read more questions and answers about conventional loans

Conclusion

In conclusion, it is important to be aware of the seller concessions that are available to you when purchasing a home with a conventional loan. By knowing what is available and asking for the appropriate concessions, you can save yourself time and money during the home-buying process.

SOURCE:
Interested Party Contributions
Types of Interested Party Contributions

Recommended Reading

  1. What are Mortgage Discount Points on a Conventional Loan? 
  2. What are the Conventional Loan Credit Requirements? 
  3. What is an Automated Underwriting System for a Mortgage?