How Seller Concessions May Offset More Than Just Closing Costs
Prospective home buyers sometimes clash with certain features in houses listed for sale. The potential buyer may be hesitant to directly ask for a price reduction. The home seller might dislike the notion of altering the listing price. Home buyers may receive financial consideration for a perceived shortcoming in a house by including a seller concession in the purchase offer.
The most common type of seller concession occurs when a seller agrees to pay some of the closing costs normally paid by buyers. Another type of seller concession may result from a cosmetic problem such as worn carpet. Most types of mortgage loans have strict limitations on the overall amount of seller concessions.
Restrictions on seller concessions are intended to protect your interests as a buyer, as well as the interests of the mortgage lender. An excessive amount of seller concessions could potentially be used to hide a selling price that is above true market value. As a result, the various categories of mortgage loans have different limitations on seller concessions.
Mortgages guaranteed by the Federal Housing Administration limit overall seller concessions to 6 percent of the home sales price. The FHA guidelines differentiate between the replacement of existing property and the addition of extra property. A seller concession for carpet replacement is allowable. On the other hand, a decorating allowance for new furnishings is not an allowable seller concession.
Fannie Mae, one of the federal agencies that set mortgage standards, refers to seller concessions as a type of interested party contribution (IPC). The maximum IPC for a loan meeting Fannie Mae guidelines are dependent on the loan-to-value ratio of the mortgage. The IPC limit can be as low as 3 percent of the sales price, or the IPC can be as high as 9 percent.
If you obtain a mortgage guaranteed by the Department of Veterans Affairs, the limit on seller concessions is 4 percent of the loan. Instead of ongoing mortgage insurance, a single funding fee is typically assessed up front on a VA loan. One of the allowable seller concessions on a VA loan is payment of the funding fee.
A seller concession should not provide cash back to the buyer at closing. Seller concessions within the allowable limits do not affect the sales price or your mortgage amount. The seller concessions simply result in a reduced amount of cash needed at closing.
Before presenting a purchase offer for a single family home, it is sometimes best to ask the home seller if they are willing to consider seller concessions. Contact a real estate agent for more advice on negotiating the purchase of a single-family home.