April 8, 2024
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April 8, 2024
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Linking Northern and Central NJ, Bronx, Manhattan, Westchester and CT

The idea of this article is to provide information that you can use when you are negotiating for the home that you’re interested in. I am in no way presuming that the seller of the home should take less than they want to or need to, or that the buyer should pay more for a home than they want to. I am just offering information on the commonly used tool called a “seller’s concession,” and sometimes this tool allows a buyer and a seller to have a meeting of the minds and allow them both to walk away feeling happy about the end result.

There are many ways to structure a seller’s concession. Commonly, the purchase price is raised to cover a percentage of closing costs for the buyer without imposing an actual cash outlay from the seller on a lower purchase price.

The important takeaway here is that before you start going back and forth on the dollar amount or percentage request for a seller’s concession, it’s important to keep in mind that there are underwriting guidelines that impose limitations on the “seller assist.”

Why Set Maximum Seller-Paid Closing Costs?

Basically, to prevent the possibility of fraud by puffing up the home value to accommodate credits while maintaining sustainable home values.

The art of structuring a seller’s concession is to increase the purchase price so that the value of the home will actually be supported by a legitimate appraisal while getting a borrower the money needed to cover a range of closing costs.

A seller cannot contribute more than actual closing costs such as legal fees, origination points, appraisal, title, tax and insurance escrows, mortgage tax (in some states), prepaid interest etc., but, and this is a big but, seller contributions may not be used to help the buyer with the down payment, or to reduce the borrower’s loan principal. Even though seller contributions are limited to actual closing costs, you can strategically increase certain closing costs to absorb all available funds from the concession (e.g., the seller is willing to contribute $7,000, but your closing costs are only $5,000; $2,000 needs to either be removed or applied toward an increased closing cost).

There Are Many Creative Ways to Use Excess Seller Contributions

You can reduce your rate by buying it down with origination fees that can be covered by a seller’s concession. Ask your lender to quote you specific costs to lower the rate. You could end up shaving 0.125% to 0.25% off your rate.

A seller credit can be used to prepay your homeowners insurance, taxes and sometimes even HOA dues. See 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 mortgage insurance or funding fees for government loan types like FHA and VA.

Seller contributions can help sellers sell their home and buyers become homeowners simply because seller contributions and other interested party credits reduce the amount of money it takes to get into a home.

Here’s a chart describing maximum seller-paid costs for conventional loans. Remember that the credit cannot be greater than the closing costs.

By using the combination of the low down payment programs out there and the seller’s concession, you may become a homeowner sooner than you think.

Conventional Loans

Occupancy

Down Payment

Maximum Seller-Paid Costs

Principal Residence or Second Home

Less than 10%

3%

10%-25%

6%

25% or More

9%

Investment Property

Any Amount

2%

 

By Carl Guzman

 Carl Guzman, NMLS# 65291, CPA, is the founder and President of Greenback Capital Mortgage Corp. He is a residential financing expert and a deal maker with over 25 years’ experience. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! He can be reached at www.greenbackcapital.com or [email protected].

 

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