How do they work and how do I calculate them?
I think seller concessions or seller contributions is an awful term, as it is so misleading. We all know there is nothing free in life! At least not free in a home sale/buy transaction. Seller concessions are essentially buyer financed closing costs/prepaid items. They are used when a borrower either does not have enough money to pay for their closing costs out of pocket or when they would rather keep their cash on hand and finance the closing costs into their loan. I am seeing seller concessions used a lot in the upstate NY area, as many first time home buyers don’t have a lot of money to put a down payment down and pay for closing costs and pre-paid items.
Here is an example: When a buyer finds a home for say $150,000 they may only want to offer $141,000 for the home, but they elect to have seller concessions. That means their offer looks like this “I’ll offer you $150,000 for your home, but I want $9,000 in seller concessions.” The seller is still only getting $141,000 but the buyer is inflating the purchase price to finance $9,000 in concessions. As long as the concessions stay below the requirements for the loan they are applying for and the home appraises high enough there won’t be any issues.
I hear that some geographic locations do not entertain concessions. Many Realtors are against them and even attorneys don’t understand them. I think that seller concessions are ingenious and I have never seen an issue with them as long as the home appraises high enough. Here is how you calculate concessions. For FHA loans the limit is 6% of your purchase price, VA is technically 4% but effectively unlimited, USDA allows for unlimited concessions, and conventional owner occupied homes are allowed 3% and investment properties are 2%. Take your clients “NET TO SELLER” offer. In the above example that is $141,000. You will then divide that number by the either .94 for 6%, .97 for 3% and .98 for 2% which will give you your total purchase price. The concessions will be the difference between the “NET TO SELLER” and “THE TOTAL PURCHASE” just calculated.
Are you using seller concessions. It may be away to help more clients if you are not.