Understanding Seller Concessions | Seller Paid Closing Costs | Seller Contributions | Seller Assist

By
Real Estate Agent with KW Hometown 1756879
https://activerain.com/droplet/4dLJ

Seller Concessions - Steve KappreHaving the seller pay some or all of your closing costs is common. Some buyers and their real estate agents have a hard time structuring these type of transactions. Below are FAQ's to help you understand the structuring needed for a purchase with seller concessions.

Clarifying Terms

When talking about this topic there will be many phrases thrown around that basically mean the same thing; seller concessions, seller paid closing costs, seller assistance, seller contributions, and more. For our purposes we will use the term seller concessions.

How much can I ask for in seller concessions?

Typically on conventional loans the most a buyer receives in seller concessions is 3% (On a $100,000 purchase, $3,000). Making a larger down payment can raise the amount of concessions allowed from 3% to 6% or even 9%. However you rarely see these high concession amounts because if a buyer is putting, for instance, 25% down on a home, they don't have the seller pay concessions for them. Not only that, but if you need 9% in concessions, something is usually wrong with your financing.

On FHA loans, you can receive up to 6% in concessions. (On $100,000 purchase price, $6,000) Typically the lower the purchase price the higher percentage of seller concessions you will need. It is not typical to have a $300,000 purchase price and need $18,000 in seller concessions. It is much more typical to see, for instance, a $60,000 purchase price and have $3,600 in concessions.

On USDA loans, there is no limit to the allowable seller concessions, other then it has to make sense. A buyer would not typically need a percentage of seller contributions over about 4-5%. There are some examples below of reasons why a high percentage of concessions would be needed.

How do I calculate the seller concessions?

Simply take the purchase price, and multiply it by the percent allowed for the type of loan. For example, a $100,000 purchase price with 3% concessions is $3,000, and 6% concessions is $6,000, etc. On a calculator, you would multiply 100,000 x .03 or .06 respectively.

What can seller concessions cover?

Seller concessions can cover your closing costs which may include mortgage related fees, title company fees, the set-up of an escrow account, your home owner's insurance costs, state taxes or stamps, and more. Many, but not all, home owner's insurance companies will allow you to pay the policy premium at settlement. If that is important to you find out upfront. Seller concessions CAN NOT be used for a down payment.

Seller Assistance - Steve KappreWhat is NOT Seller Concessions?

Grants are not seller concessions. Down-payment assistance programs are not seller concessions either.

For first time home buyers, a lender and real estate agent that work together closely can structure an offer to purchase a home where you can utilize both a grant to pay for all of your required downpayment, and seller concessions to cover all of your closing costs. It is not rocket science. You simply have to work with people that know what they are doing.

It is important for your lender and your real estate agent to convey approval terms BEFORE making an offer on a home. Any real estate agent worth your time would have a buyer pre-approved before submitting offers on a home. This being said, it is important that your real estate agent not only knows how much you can afford, but also the terms and conditions of your approval. Some pre-approvals are contingent on seller concessions and/or grants. This needs to be communicated to all parties up-front.

Am I paying more for a home if I use seller concessions?

Some people may look at their purchase of a home in this way; (Using round figures) I can pay $190,000 for a home and pay my own settlement costs of $10,000 I can pay $200,000 for a home and have the seller pay $10,000 of my settlement costs. Viewed this way you are actually financing the costs. You pay interest on $10,000 more, BUT you get to keep $10,000 in your pocket, which more importantly you can keep for a safety net (and earn interest from yourself).

SIDE NOTE: This aspect can not be over-emphasized. If your lender thinks it is "OK" to put you in a home where you have literally a few hundred dollars in the bank after settlement, you both are setting up for a VERY RISKY situation and one which could go into default very quickly. It is unwise to purchase a home after which you are immediately poor! It would do all home buyers well to consider this before purchasing a home. Hopefully you will have a lender or real estate agent who would care more about you in this fashion.

Ways to utilize seller concessions for your benefit

  • Have some or all of your closing costs paid by the seller.
  • As a first time home buyer utilize both a grant and seller concessions to cover your closing costs and down payment requirements.
  • Create a financially safe environment by keeping more money in your pocket after settlement. This aspect is overlooked too often yet is very important to you as a home owner.
  • Have the seller pay points for you. This will make your monthly mortgage payment lower by giving you a lower interest rate.  In some cases this can be the deciding factor on if you qualify to buy a home. This will also lower your debt-to-income ratio, which is one of the major factors a lender looks at when approving a loan.
  • Avoid private mortgage insurance (PMI). If you are a buyer that has the assets available to make a 20% down payment, but not enough assets to pay closing costs, then have the seller pay your closing costs. This will bring you to the 80% loan-to-value level and allow you to eliminate PMI. (NOTE: This is all negotiated when you make your offer on a home and agree to terms).

Conclusion

Seller concessions are an important part of home financing. Used correctly, seller concessions can save a buyer money, allow more financing options, and create a financially safe environment. Consider these important aspects prior to making an offer on a home and you will be much better off, both at settlement and in the long term.

If you have any questions about seller concessions or any other mortgage/real estate topic(s), feel free to contact Steve Kappre directly.

 


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Steve Kappre is a Mortgage Planner with Treasury Mortgage. Steve specializes in;

• All areas concerning First-Time Home Buyer Mortgages, grants, down payment assistance, police and fire loans, rehab loans, and more.

Reverse Mortgages

• Equity Management strategies for high-end homes and high net worth individuals.

Contact Steve Kappre directly at 856-419-3561 or at www.stevekappre.com

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Re-Blogged 14 times:

Re-Blogged By Re-Blogged At
  1. William James Walton Sr. 07/06/2009 08:48 AM
  2. Linda K. Mayer 07/06/2009 04:42 PM
  3. Chip Jefferson 07/07/2009 12:35 AM
  4. Kim Orlando 07/07/2009 02:16 AM
  5. Jason Kardos 07/07/2009 04:23 AM
  6. Bridget Cella 07/07/2009 06:11 AM
  7. Paul Silver 07/07/2009 07:22 AM
  8. Liz Loadholt 07/07/2009 07:58 AM
  9. Nellie Lytvinenko 07/07/2009 08:32 AM
  10. Nellie Lytvinenko 07/07/2009 08:54 AM
  11. Gina Chirico 07/07/2009 04:03 PM
  12. Andrea Kappre 07/08/2009 01:59 AM
  13. John Kelly 11/24/2009 04:03 AM
  14. Debbie Rumsey 02/10/2010 01:52 AM
  15. Alix Pinzon 02/10/2010 02:44 AM
  16. John Chaump 02/19/2010 06:18 AM
  17. Charles Stallions 03/12/2012 11:26 AM
Topic:
Mortgage / Finance
Location:
New Jersey Gloucester County
Groups:
South Jersey
New Jersey & Pennsylvania -- Realtors/Loan Officers/Title Clerks/Real Estate Lawyers
1st Time Buyers
New Jersey Real Estate Experts
Gloucester County, NJ
Tags:
nj first time home buyer

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Show All Comments
Rainer
74,325
Dan Magstadt
Paramount Residential Mortgage Group, Inc - Lake City, FL

Great info Steve - This is well laid out & easy to understand. 

Best, 
Dan

Jul 07, 2009 03:54 AM #49
Rainmaker
647,209
Team Honeycutt
Allen Tate - Concord, NC

I enjoyed what you had to say!  Very informative and easy to understand.

Jul 07, 2009 04:50 AM #50
Rainmaker
76,386
Bridget Cella
Re/Max Connection - Sewell, NJ
e-Pro, Realtor

Great info - thanks for giving me something good to re-blog

Jul 07, 2009 06:13 AM #51
Rainer
138,818
Paul Silver
Tiverton, RI
Rhode Island full service real estate firm

Good stuff... I reblogged this as well... hopefully it will go a long way to explaining this aspect of a transaction to both Buyers and Sellers.

Jul 07, 2009 07:23 AM #52
Rainer
47,697
Al Dobbs
ADD Real Estate - North Chicago, IL

Having the seller pay closing costs makes it easier for my clients to focus on getting that down-payment money. I also do not have to worry about surprises at the end. Where some small item may have been forgotten. There is money on the table to take care of the small issues.

Jul 07, 2009 11:07 AM #53
Rainmaker
1,017,710
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate

Great job with this article Steve. Nice to here you are numero uno as well!

Jul 07, 2009 02:16 PM #54
Rainer
295,255
Stephen Kappre
KW Hometown - Mantua, NJ
Helping You Home

Gene - good advice indeed

Ginger - You are welcome

Doyle - I appreciate your encouragement very much, thank you

Dan - Thanks

 

Jul 07, 2009 02:46 PM #55
Rainer
295,255
Stephen Kappre
KW Hometown - Mantua, NJ
Helping You Home

Team Honeycutt - thanks a million

Bridget - thanks for reblogging!

RI - I hope it helps your clients indeed

Al - Well said and very true

Bill - Thanks for the kind words. Somewhere in the mix od it all I owe some things to you.:)

Jul 07, 2009 02:49 PM #56
Rainer
295,255
Stephen Kappre
KW Hometown - Mantua, NJ
Helping You Home

Moveable - It always pays to work with someone knowledgable!

Jul 09, 2009 05:14 AM #58
Anonymous
Sharon A. Parisi

Thank you for a great explanation on seller concessions!

Jul 12, 2009 03:02 PM #59
Rainer
295,255
Stephen Kappre
KW Hometown - Mantua, NJ
Helping You Home

Sharon - You are welcome

Jul 13, 2009 04:22 AM #60
Anonymous
Barbara Q.

STEVE- GREAT JOB! 

Have the seller pay points for you. This is key!

Permanent Buydowns are a great way to go if you anticipate being in a property for more than 5-7 years. BUT- the FTHB's who will be moving up within 5 years REALLY appreciate the substantial upfront savings of the 2-1 Temporary Buydown.

Thanks again for informing the masses!

Aug 06, 2009 05:09 AM #61
Rainer
295,255
Stephen Kappre
KW Hometown - Mantua, NJ
Helping You Home

Barbara - That is certainly a way to do it - and sometimes the only way for certain buyers!

Aug 06, 2009 05:16 AM #62
Rainmaker
313,009
Tamara Inzunza
RE/MAX Executives - Alexandria, VA
Close-In Alexandria and Arlington Living

Great article, and love your domain name!  Very creative.

Jan 24, 2010 06:23 AM #63
Rainer
283,233
Mark Montross
Catamount Realty Group - Burlington, VT
Listing and Buyer Specialist

Steve, thank you for the very informative article. I am new in the business and just received an offer on one of my listings asking for a concession. This clarifies things quite a bit.

Feb 17, 2010 10:29 PM #64
Rainer
9,407
Mindy Kaye
MindyK Photographer - Charleston, SC
Real Estate Photography by MindyK

I have no qualms about paying incentives to Buyer's if the deal is mutually agreed! Thanks for sharing this!

Feb 18, 2010 12:57 AM #65
Rainer
295,255
Stephen Kappre
KW Hometown - Mantua, NJ
Helping You Home

Mark - That's great to hear!

Mindy - welcome

Feb 18, 2010 02:47 AM #66
Rainer
11,177
John Chaump
RE/MAX Advantage - Levittown, PA

Steve,

Thank you for writing wuch an informative piece. You are a very gifted writer and crredit to our industry. I learn something every time. Keep up the good work.

John Chaump

John@JohnChaump.com

Feb 19, 2010 06:10 AM #67
Rainer
295,255
Stephen Kappre
KW Hometown - Mantua, NJ
Helping You Home

John - Thank you for your kind words!

Feb 19, 2010 06:16 AM #68
Rainer
3,138
Alan Batista
Jersey City, NJ
Alan

Hi Steve,

I still have one quesiton though!

Let's say the offer was $110k including $10k in seller's concessions (without any limitations in the contract). The pre-paids and closing costs sum up to $5k and there is $5k left. But buyer doesn't want to buy points. What happens to the remaning $5k? What exactly can be done with it? Does it revert back to the seller? How can the buyer not lose that money? I couldn't find the answer to this question anywhere!

Your response is much appreciated.
Thank you,
Alan

 

Jun 03, 2013 02:14 AM #69
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Stephen Kappre

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