Mortgage closing costs range from 2-5% of the home’s purchase price. That can add up. But many sellers are eager to pay your closing costs in order to sell their home faster.
There is a limit to how much they can pay for. Each loan type – conventional, FHA, VA, USDA – sets maximums on seller paid closing costs.
Seller paid costs are also known as sales concessions, seller credits, or seller contributions. Whatever you want to call them, new and experienced home buyers can get into homes faster with help from the seller.
Seller Contributions by Loan Type
Each loan type has slightly different rules when it comes to seller contributions.
Maximum Seller-Paid Costs for Conventional Loans
Fannie Mae and Freddie Mac are the two rule makers for conventional loans. They set maximum seller paid closing costs that are different from other loan types such as FHA and VA.
Here’s a chart describing maximum seller paid costs for conventional loans.
Maximum Seller Paid Costs
Principal Residence or Second Home
Less than 10%
25% or More
While seller paid cost amounts are capped, the limits are very generous.
A home buyer purchasing a $250,000 house with 10% down could receive up to $15,000 in closing cost assistance (6% of the sales price). This dollar figure is a lot more than the typical seller is willing to contribute, so the limits won’t even be a factor in most cases.
FHA Seller Contributions
For all FHA loans, the seller and other interested parties can contribute up to 6% of the sales price or toward closing costs, prepaid expenses, discount points, and other closing costs.
If the appraised home value is less than the purchase price, the seller may contribute 6% of the value.
VA Loan Seller Contribution Maximum
The seller may contribute up to 4% of the sale price, plus reasonable and customary loan costs on VA home loans. Total contributions may exceed 4% because standard closing costs do not count toward the total.
According to VA guidelines, the 4% rule only applies to items such as
- Prepayment of property taxes and insurance
- Appliances and other gifts from the builder
- Discount points above 2% of the loan amount
- Payoff of the buyer’s judgments and debts.
- Payment of the VA funding fee
For instance, a buyer’s core closing costs for things like appraisal, loan origination and title equal 2% of the purchase price. The seller agrees to prepay taxes, insurance, the VA funding fee, and a credit card balance equal to 3% of the sales price.
This 5% contribution would be allowed because 2% is going toward bona fide loan closing costs.
USDA Seller Contributions
USDA loan guidelines state that the seller may contribute up to 6% of the sales price toward the buyer’s reasonable closing costs.
Interested Party Contributions
Seller paid costs fall within a broader category of real estate related funds called interested party contributions or IPCs. These costs are contributions that incentivize the home buyer to buy that particular home. IPCs are ok up to a certain dollar amount, but above that they are not allowed.
Who is considered an interested party? Your real estate agent, the home builder, and of course the home seller. Even funds from down payment assistance programs are considered IPCs if the funds originate from the seller and run through a non-profit.
Anyone who might benefit from the sale of the home is considered an interested party, and their contribution to the buyer is limited.
Why Set Maximum Seller Paid Closing Costs?
Mortgage rule makers such as Fannie Mae, Freddie Mac, and HUD aim to keep the housing market fair and keep values and prices sustainable.
Here’s an example of how rampant seller paid closing costs and other interested party contributions could inflate prices.
Imagine you are buying a home worth $250,000. The seller really wants to sell the home fast so he offers $25,000 to pay for your closing costs and says you can keep whatever is left over. But in exchange he changes the home price to $275,000.
He then illegally pays the appraiser to establish a value of $275,000 for the home.
A number of negative consequences arise:
- You paid too much for the home.
- Similar homes in the neighborhood will start selling for $275,000, and more if the cycle is repeated.
- The bank’s loan amount is not based on the true value of the home.
In a very short time, property values and loan amounts are at unrealistic levels. If homeowners stop making their payments, banks and mortgage investors are left holding the bill.
Can the Seller Contribute More than Actual Closing Costs?
No. The seller’s maximum contribution is the lesser of the sales price percentage determined by the loan type or the actual closing costs.
For instance, a home buyer has $5,000 in closing costs and the maximum seller contribution amount is $10,000. The maximum the seller can contribute is $5,000 even though the limits are higher.
Seller contributions may not be used to help the buyer with the down payment, to reduce the borrower’s loan principal, or otherwise be kicked back to the buyer above the actual closing cost amount.
Creative Ways to use Excess Seller Contributions
While seller contributions are limited to actual closing costs, you can constructively increase your closing costs to use up all available funds.
Imagine the seller is willing to contribute $7,000, but your closing costs are only $5,000. A whopping $2,000 is on the line. Use it or lose it.
In this situation, ask your lender to quote you specific costs to lower the rate. You could end up shaving 0.125%-0.25% off your rate using the excess seller contribution.
You can also use seller credits to prepay your homeowners insurance, taxes and sometimes even HOA dues. Ask your lender and escrow agent if there are any sewer capacity charges or other transfer taxes or fees that you could pay for in advance. Chances are there is a great way to use all the money available to you.
You can even use seller credit to pay upfront funding fees for government loan types like FHA. See the next section.
Use Seller Contributions for Upfront FHA, VA, and USDA Fees
All government-backed loan types allow you to prepay funding fees with seller contributions.
FHA. FHA loans require an upfront mortgage insurance payment equal to 1.75% of the loan amount. The seller may pay this fee. However, the entire fee must be paid by the seller. If you excess seller credit, but not enough to cover the entire upfront fee, you cannot use the funds toward the fee.
VA. The seller can pay all or part of upfront fee of 2.15% – 3.3% of the loan amount. The fee counts towards VA’s 4% maximum contribution rule.
USDA requires an upfront guarantee fee of 2.0% of the loan amount. The buyer can use seller contributions to pay for it.
Seller Contributions Help Many become Owners
Seller contributions and other interested party credits reduce the amount of money it takes to get into a home.
Zero-down loans such as USDA and VA require nothing down. But, opening any loan involves thousands in closing costs.
A seller credit can remove the closing cost barrier and help buyers get into homes for little or nothing out-of-pocket.
To see if you qualify to buy a home with zero down and low out-of-pocket expense, click here and complete a short form.
Many home shoppers are surprised that they not only qualify, but initial homeownership costs are much lower than they expected.
Cover photo by Luke Pamer