VA Loans, Seller Concessions, and Discount Points

When you apply for a mortgage loan, one option you have is to purchase "discount points" that can lower the amount of interest on the mortgage.

The ability to purchase discount points is also available for VA home loans (talk to your loan officer about this option and how it works), but one question that sometimes comes up related to buying this points is whether the seller can purchase discount points on behalf of the buyer.

And, more importantly, does such activity construe what the VA calls an "inducement to purchase" which can lower the VA loan amount on a dollar-for-dollar basis?

Inducements to purchase often happen when there's a seller concession--described in the VA loan rulebook as "anything of value added to the transaction by the builder or seller for which the buyer pays nothing additional and which the seller is not customarily expected or required to pay or provide"--are permitted as long as they aren't excessive and limited to the following list:

• payment of the buyer’s VA funding fee
• prepayment of the buyer’s property taxes and insurance
• gifts such as a television set or microwave oven
• payment of extra points to provide permanent interest rate buydowns
• provision of escrowed funds to provide temporary interest rate buydowns,
• payoff of credit balances or judgments on behalf of the buyer."

That list comes directly from the VA loan rulebook, so it's clear that a seller who wants to purchase discount points on behalf of the borrower on the VA loan IS permitted to do so.

But there are limits. Seller concessions are limited, according to VA Pamphlet 26-7, which says "Any seller concession or combination of concessions which exceeds four percent of the established reasonable value of the property is considered excessive, and unacceptable for VA-guaranteed loans."

So while the seller can buy discount points, does the seller have to worry about exceeding the four percent limit? Yes and no--there's an additional rule on the seller's purchase of discount points--one we'll cover in our next blog post.

Do you have questions about VA home loans? Ask us in the comments section.