Whether buying a first home or 10th one, there are key elements in the home buying process. One area can actually make the difference between getting to the closing table or not. That is seller paid closing costs for the buyer. Some believe that a request for seller paid costs is a sign of weakness. Rather, it could be a great strategy for both the buyer and the seller. Offering buyer closing cost assistance could attract more buyers. Additionally, buyer assistance could be the final piece to make the numbers work on a certain home.
Basically, seller paid costs is a way of allotting a certain dollar amount in the purchase price towards paying the buyer’s settlement charges. By including this figure into the purchase price, it allows a buyer to include all or a portion of their closing costs into their loan. Keep in mind, this feature is not a verbal agreement as it must be documented on the purchase contract and closing disclosure. In most markets, understanding how this closing cost strategy works and the closing cost allowances by each loan program can make or break a home purchase. So, no matter if you are a Realtor, buyer, seller, or even mortgage lender, we highly suggest reading on.
How Much Seller Paid Closing Costs Should I Ask For?
This is a great question. Another common question is “What is the customary closing costs paid by a seller?”. This answer varies by market, buyer, and loan product. Too often, buyers and their Realtors throw out an arbitrary number on the offer to contract. Therefore, many contracts made without consulting the mortgage loan officer may cause a closing issue. It is tough when an executed contract comes back that is short on seller paid closing costs. Then a buyer with no money down is short funds to close. At minimum, this causes undue stress on a buyer with limited funds. Basically, this does no good to anyone.
So, what is the best way to ensure the right amount of seller assistance for the buyer? Foremost, is have a discussion among the buyer, buyer’s agent, and the mortgage loan officer. This discussion should involve buyer needs and goals, potential seller limitations, how much the market allows, and loan program limitations. Such discussion should result in a sound buyer strategy towards a successful closing plan.
Each home loan program has its nuances, restrictions, and cool strategies. Let’s discuss each so you can start the discussion with a knowledgeable head start.
FHA Closing Costs Paid by Seller
Like all mortgage loan products, FHA has a limit for how much the seller may contribute towards buyer expenses. Not only in amount but also by type. The maximum seller paid closing costs involving an FHA loan is 6% of the sales price. Furthermore, FHA lumps contributions by other interested parties into this limitation. Interested parties include the seller, real estate agents, builders, developers, or others that could have an interest in the transaction. So, the seller and any interest party may contribute up to a total of 6% of the purchase price to the buyer.
What Items May the Seller Pay for the Buyer?
There are specific costs which are allowed to be paid by the seller or other interested party. They are defined as…
- Origination fees
- Discount points
- Closing costs
- Pre-paids (first year insurance premiums, escrow set up, interim interest)
- Permanent & temporary interest rate buy downs
- Mortgage interest payments for fixed rate mortgages
- Mortgage payment protection insurance
- Upfront Mortgage Insurance Premium (FHA funding fee)
Anything paid above the 6% is allowed, yet it will result in a dollar for dollar reduction to the purchase price when figuring the loan amount. Additionally, none of the seller assistance may contribute towards the buyer’s minimum required investment. Thus, a buyer is still responsible for the 3.5% down payment (or $100 if using the HUD $100 down program). Keep in mind the minimum down payment may also be a documented gift too! FYI, the FHA seller contribution limits also apply to both FHA 203k renovation programs.
Are you short on seller paid closing costs? Did you know that your Realtor can pay buyer costs from their commission? Sure can! Learn how this works here.
Learn more about FHA loan perks and strategies by clicking on one of the links below!
You can always use the search bar at the top of the page to find answers to most topics too
Conventional Loan Seller Paid Closing Cost Limits
When it comes to conventional loans, it includes both Fannie Mae and Freddie Mac guidelines. Because conventional loans serve many types of transactions, it gets a little tricky. The conventional limitations vary based on whether buying a primary, secondary, or investment residence. Most of the time, the down payment percentage also determines the seller paid maximum.
Primary Residence Maximum Seller Paid Closing Costs
When using a conventional loan to purchase a primary residence, the down payment could be as low as 3% of the sales price. Yet, the down payment could be 5%, 10%, 15%, 20%, or a lot more. As mentioned, the level of down payment sets the maximum seller assistance as follows.
- Less than 10% down = 3% of sales price
- 10% through 24.99% down payment = 6% of sales price
- 25% or more down payment = 9% of sales price
All of the conventional seller paid cost limits mentioned apply to the HomeStyle Renovation loan as well.
Second Home Purchase Seller Paid Closing Costs
Buying a second home with a conventional mortgage requires a minimum of 10% down payment. Basically, it follows the primary residence maximum seller paid limits other than less than 10% limits since it isn’t allowed
- 10% – 24.99% down = 6% of the sales price
- 25% or more down payment = 9% of the sales price
Did you know that buying a second home using a Fannie Mae loan only requires 5% of the buyer’s own funds? The rest could be a gift! Also, using gift of equity when buying a second home from a family member is allowed. How about those tidbits?
Investment Property Seller Paid Closing Costs
If buying a rental, otherwise known as investment property, the minimum down payment is 15%. Unlike primary or secondary residence seller paid levels, rental properties are cut and dry. So, no matter how much down payment is applied, the maximum seller paid closing costs is 2% of the sale price. Usually, rental property buyers do not need seller assistance. Although, it could be part of a good strategy to finance all possible into a low rate loan.
USDA Seller Paid Closing Costs
USDA loans are probably the most forgotten yet beneficial home loans available. Providing no money down to qualified buyers and properties, there are many advantages to using a USDA Rural Development loan. In addition to the no money down aspect, a buyer could also turn their purchase into a true no cash to close scenario. That’s right, paring a USDA loan with seller paid closing costs allowed could cover everything. Often, buyers even receive all or a portion of their earnest money deposit back at closing. When it comes to seller paid costs, USDA keeps it simple. The maximum seller contribution is 6% of the sales price. Just like FHA.
Want to learn more about how USDA could benefit you? Check out these links!
VA Loan Seller Paid Closing Costs
When it comes to seller paid closing costs for the buyer, nothing beats a VA loan. Not only do VA loans allow offer no down payment, but it features additional flexibility so active military, Veterans, and surviving spouses may potentially bring nothing to closing. When it comes to actual closing costs, the seller could actually pay all of the buyer’s “closing costs”. Unlike the other loans which lump closing costs and prepaids together, VA splits them up.
VA Loan Sales Concessions
Now, VA loans allow the seller to cover all closing costs. But, the prepaids (first years insurance premium(s), escrow set up, or interim interest) fall under the maximum sales concessions limit. VA does limit the sales concessions to 4% of the sales price. Together, the maximum seller paid closing costs and 4% towards sales concessions cover everything on most purchases. These limits also apply to VA renovation loans. Where VA loans get really creative is in this sales concession category! Did you know that the seller may even pay for things like the following?
- Lease buyout
- Payoff collections or judgments
- Payoff debts
- VA funding fee
- Down payment
That’s right! Whether these items are necessary for qualification or it just makes the Veteran buyer more comfortable to include these items, it is allowed! Want to learn more? Check out these great articles that expand on VA topics!
Are You Using These Seller Paid Closing Cost Strategies?
Maybe using seller paid costs is the only way you can make a home purchase happen. If that is the case, figuring an amount prior to the contract offer is key. That means discussing the property price, costs, and total payment with an experienced loan officer is key. Buyers do not want to be surprised a required extra $1000 – $2000 needed for closing!
Other buyers have the funds for closing costs, but have you thought about the benefit of using that money elsewhere? Keeping the funds for an emergency, doing a little home improvements to the home, or paying off higher rate debt could be alternatives. Then, a great strategy is to request seller paid closing costs which lowers the cash to close. Every dollar of seller paid costs lowers the cash to close by a dollar!
Have questions or want to have a discussion? Contact a loan officer now!