Question: We want to buy a home and we want the sellers to pay some of our mortgage costs. They’re getting a lot of cash at closing and through our purchase we’re making the sale possible. In effect, we want a discount. Is this possible?
Answer: So-called “seller contributions” have long been a part of the real estate marketplace, concessions by the seller to help the buyer get the property. That said, while purchasers may like seller contributions owners are less than thrilled with the idea. Sellers will oppose contributions in the same way they will object to a proposed price cut. However, if the market is slow, if a particular home is not selling, then it may be possible to get a seller contribution.
Seller contributions can be a big deal. Buy a home for $250,000 and a 3 percent seller concession equals $7,500. That’s a lot of money and in some cases even larger concessions are allowed.
Lender Rules and Seller Contributions
In addition to owners, mortgage loan programs are also leery of seller contributions. The worry is that buyers will fudge loan requirements with seller money and pay less than they should for the down payment, thus increasing lender risk. Here’s a look at the seller contributions and their limits.
Fannie Mae and Freddie Mac buy mortgages from lenders. These so-called “conforming” loans allow seller contributions, or what are formally known as “interested party contributions” or IPCs. Interested parties can include not only sellers but also real estate brokers, lenders, builders and developers. Seller funds can be used for such purposes as buying down interest rates and lowering closing costs.
Seller contributions cannot be applied to the down payment. Down payment money must come from the buyer or from allowable and disclosed gift sources such as parents and employers.
Don’t even think about undisclosed IPCs. You must tell lenders about every consideration which is part of the transaction. Fannie Mae, for example, bans undisclosed seller contributions for such things as “moving expenses, payment of various fees on the borrower’s behalf, ‘silent’ second mortgages held by the property seller, and other contributions that are given to the borrower outside of closing and are not disclosed on the settlement statement.”
Conforming Seller Contribution Limits
For primary residences Freddie Mac and Fannie Mae allow seller contributions of as much as:
- 9 percent of the purchase price for buyers with at least 25 percent down.
- 6 percent if the property is purchased with 25 percent to 15 percent down.
- 3 percent with 10 percent down or less.
For investment properties seller contributions are limited to 2 percent of the purchase price.
The FHA allows seller contributions of up to 6 percent. Payments may be made by “sellers, real estate agents, builders, developers or other parties with an interest in the transaction,” according to HUD. The 6 percent limit, says HUD, includes:
- Origination fees.
- Closing costs.
- Mortgage discount points.
- Payment for permanent and temporary interest rate buy downs, and other payment supplements.
- Payments of mortgage interest for fixed rate mortgages.
- Mortgage payment protection insurance.
- Payment of the Upfront Mortgage Insurance Premium (UFMIP).
The VA allows “seller concessions” of as much as 4 percent. Combine seller concessions with a loan program that allows buyers to purchase with no money down and you have a truly interesting mortgage option.
According to the VA seller concessions can include:
- 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.
- The payoff of credit balances or judgments on behalf of the buyer.
“Seller concessions,” says the VA, “do not include payment of the buyer’s closing costs, or payment of points as appropriate to the market. Example: If the market dictates an interest rate of 7½ percent with two discount points, the seller’s payment of the two points would not be a seller concession. If the seller paid five points, three of these points would be considered a seller concession.”
When looking at seller concessions be aware that standards may change. For instance, in the past HUD has suggested that it might want to reduce allowable seller concessions, saying in 2012 that it “is now seeking to reduce allowable seller concessions in order to protect FHA and borrowers from the impacts of inflated appraisals.”
Six years later nothing has happened, however it’s possible for the limits to change. For this reason always check with loan officers regarding current seller contribution rules.