Seller concessions are the amount that can be negotiated within the sales contract to help your buyer with out of pocket expenses such as closing costs or pre-paid costs. However, there are limits to seller concessions, and as a mortgage loan originator, you should be able to explain these limits for the major home loan programs to your clients.
Why Use Seller Concessions?
A seller may ask you why they would offer concessions rather than just lower the price of the home. The answer is basic math: if a seller can deduct some of the costs associated with seller concessions from their taxes, they will. Advise sellers to check with a professional tax adviser first before finalizing any concessions made.
Restrictions are Based on Your Mortgage
Seller concession restrictions will depend on the type of mortgage you’re applying for. These percentages can change at any time and vary depending on the transaction. The exact amount depends on several factors, including:
- The kind of mortgage the buyer chooses
- How the home will be occupied
- The amount for which the home appraises
General seller concessions for how much a seller can pay towards a buyer’s closing costs via the loan programs are as follows:
- FHA Loans: 6%
- Conventional Loans: 6%
- VA Loans: 4%
- USDA Loans: 6%
Keep in mind that your employer may have tighter restrictions than the general loan program guide. Make sure your clients are aware of any lender overlays that may affect seller concessions.
Be Aware of Illegal Seller Concession Schemes
There are restrictions and rules that govern what seller concession practices are legal. For example, a common unethical and illegal practice is for a buyer to inflate the price of a home and ask for “cash under the table” at closing in lieu of raising the price of the home.
If your borrowers or the home seller presents this type of arrangement, explain that this path is unethical and can lead to legal ramifications.