Seller concessions are closing costs that the seller has agreed to pay. Sometimes, you can ask the seller to contribute to specific closing costs. Other times, sellers may just pay a percentage of the total closing costs. Read on to know the limits of seller concessions.
Are there limits to seller concessions?
Your seller can’t pay all your closing costs, but how much they can pay depends on the type of loan you’re getting. The total amount cannot exceed your total closing costs.
Why are there limits?
Fannie Mae and HUD set limits on seller concessions to discourage inflation in the housing market. For example, let’s say you want to buy a home worth $450,000. The seller offers to sell you the home for $500,000, but they also offer you $50,000 in closing costs and tell you to keep anything left over.
This will cause local housing prices to rise since other sellers and agents see what the home sold for, and price their homes hitting the market similarly. This cycle can quickly cause home and rent prices to rise to unsustainable levels. Which is why sellers are only allowed to contribute a small percentage of the home’s value towards closing costs.
What are the limits?
The limit for conventional loans depends on how much you’re putting down:
- If your down payment is less than 10%, the seller can contribute up to 3%.
- If your down payment is 10 – 25%, the seller can contribute up to 6%.
- If your down payment is more than 25%, the seller can contribute up to 9%.
- If you’re buying an investment property, the seller’s contribution is limited to 2%, no matter what your down payment is.
For all FHA loans, the seller can contribute up to 6%.
For USDA loans, the seller can contribute up to 6% of the buyer’s loan amount. This is the one loan type where the seller concessions are not based on the home price or appraised value.
VA loan rules dictate that the seller can contribute up to 4%. Seller concessions on VA loans may include payments toward a buyer’s judgments and debts, as well as VA funding fees.
For more information contact us. Let us help navigate your choices and make an informed decision.