How First-Time Home Buyers Can Get Help With Closing Costs from Sellers
What are Seller Concessions?
Seller concessions, sometimes referred to as Interested Party Contributions (IPC) or ‘Seller Assist’, are when a home buyer (you) asks the home seller (not you) to pay some or all of the costs on the home buyer’s behalf. These costs could include:
- Homeowner's insurance
- Property taxes due at closing
- Escrow account set up
- Pre-paid interest
- Attorney/settlement agent fees
The purchaser may request seller concessions during contract negotiations, or the seller may offer a concession during the listing process.
How Do Seller Concessions Work?
Let’s say that the agreed sales price between a buyer and a seller is $200,000. The buyer needs an additional $7000 to cover their closing costs and prepaids such as: taxes, insurance, and escrows.
The buyer then asks the seller for a credit of $7000 to be given at closing. The sale price of the house then increases to $207,000. The buyer receives the credit of $7000 at the time of closing and the seller still nets the agreed upon price of $200,000.
However, there are stipulations: 1) the home must appraise for a sale price of $207,000 and 2) the buyer must pay an increased down-payment based on the increased sales price, e.g., conventional 5% down on $200,000 is only $10,000 while 5% on $207,000 is $10,350.
But understand, the seller isn’t really paying your closing costs – you are mortgaging them.
Seller concessions are allowed on all major loan types, including conventional loans backed by Fannie Mae and Freddie Mac; FHA loans backed by the Federal Housing Administration; VA loans backed by the Department of Veterans Affairs; and, USDA loans backed the U.S. Department of Agriculture.
However, there are limits. You cannot request unlimited seller concessions. Depending on the buyer's loan type, seller concessions are capped to a specific percentage of the loan size. For instance:
- FHA = 6% of sales price
- A conventional loan = 3% seller concessions for loans with LTVs greater than 90%, 6% for loan LTVs between 75-90% (owner occupied/2nd home)
- Investment properties are capped to 2% of the purchase price.
