One of the most confusing aspects of the purchase process for home buyers is sellers concessions. They've heard their mortgage lender mention it, in lieu of the buyers needing to bring to closing all of their closing costs, pre-paids, etc. It's also been discussed with their buyers agent during the process and while sitting down to write an offer on a home. It is still confusing to most buyers though unless you draw it out for them - who is really paying for what, and what it means to them in the amount they will finance. The table below is an example of a buyer who is putting 3 1/2% down on their FHA mortgage and asking for the allowed 6% in sellers concessions:
$100,000 purchase price
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6% in sellers concessions toward pre-paids, closing costs, and/or tax prorations
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Purchasers down payment 3 1/2%
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Sellers net $94,000
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Amount financed by the purchasers : $96,500
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Notice that I highlighted the "Sellers net". This is what the seller will be concerned about as they go over your offer to purchase. If the "net" isn't what they had in mind and counter offer, they probably will do so at the expense of the sellers concessions towards you. Let's say for example that the sellers have decided they want their "in our pocket" to be $97,000. If you need all 6% of the allowable sellers concessions in order to purchase the home you will have to finance your closing costs. An example of a counter offer to make it work for the sellers and for you:
$103,200 purchase price
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6% in sellers concessions towards pre-paids, closing costs, and/or tax prorations
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Purchasers down payment 3 1/2%
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Sellers net $97,008
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Amount financed by the purchasers: $99,588
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Helpful tip: Ask your mortgage lender to give you 2 or 3 different Good Faith Estimates. In these estimates the lender can estimate your payment based upon 2 or 3 different mortgage amounts. If you do this prior to writing your offer to purchase you will be able to make a comfortable decision on what would be your final offer to the seller.
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Excellent point, Kris, and also one overlooked by many buyers.
The Seller has to have a certain NET proceeds to sell, and there is more than one way to get there.