Can you benefit from a seller concession? If you’re purchasing with a VA loan, the answer is yes, perhaps thousands of dollars in savings.
There are two sides to real estate sales. We have the cost side, which includes the purchase price of the home and costs to close the deal at settlement. To offset the costs we have the down payment, cash to the seller from the VA loan and other credits.
As you likely know, with a VA loan there is no down payment requirement and closing costs are held to a minimum. But what are those “other” credits?
One form of “other” credit can be what’s called a seller concession, which is also known as a seller contribution. The VA defines a seller concession as “anything of value added to the transaction by the builder or seller for which the buyer pays nothing additional and which the seller is not customarily expected or required to pay or provide.”
VA rules say that the value of a seller concession can equal as much as 4 percent of the selling price. That’s in addition to “normal” discount points and payment of the buyer closing costs.
The VA seller concession rule is very good — it compares with a 3-percent limit for conventional mortgages and a 6-percent limit for FHA financing, a number which is expected to be soon be reduced.
No owner, of course, gleefully gives away money or goods. The real purpose of a seller contribution is to speed the sale of a property by lowering the effective price within allowable guidelines. Given the tough markets in many areas, seller contributions are undoubtedly widespread. Alternatively, when home sales are strong and prices are rising, seller concessions are virtually impossible to get.
So what can seller concessions include? The VA offers this list of examples:
• Payment of the buyer’s VA funding fee.
• Prepayment of the buyer’s property taxes and insurance.
• Gifts such as a television set or microwave oven.
• The payment of extra points to provide permanent interest rate buydowns.
• The provision of escrowed funds to provide temporary interest rate buydowns, and
• The payoff of credit balances or judgments on behalf of the buyer.
The VA also says that “seller concessions do not include payment of the buyer’s closing costs, or payment of points as appropriate to the market.”
To see the importance of seller concessions imagine that you buy a property for $200,000. The local market is weak. The owner — unable to sell for months — agrees to pay all closing costs plus $8,000 to pay off an auto loan balance. Paying off the car loan saves $200 a month.
When the property closes the official record will say that it sold for $200,000. In fact, the VA buyer will have no closing costs, no down payment and, in this case, a pesky $8,000 debt paid off at settlement.
The VA says “any seller concession or combination of concessions which exceeds four percent of the established reasonable value of the property is considered excessive, and unacceptable for VA-guaranteed loans.” Why? Because a transaction with too many discounts and concessions may not be a bargain, it could actually hide an above-market selling price that means additional risk for the VA — and for borrowers.
You can find out more about VA seller concession policies by speaking with a Veterans United loan officer.
Image courtesy sherwoodrealestate