Seller concessions are when a VA home buyer asks the home seller to pay costs associated with the VA Loan on the home buyer’s behalf. The VA permits seller concessions, but requires that seller concessions do not exceed 4% of the loan amount.
Types of seller concessions include:
- Prepaying taxes and insurance on the home,
- Paying extra points to provide a permanent interest rate buydown,
- Provisioning escrowed funds to provide a temporary interest rate buydown,
- Paying the buyer’s VA funding fee,
- Paying off judgements or credit balances on the buyer’s behalf, or
- Gifts, such as a microwave or dishwasher.
To be clear, seller concessions go beyond the typical closing costs associated with obtaining a mortgage. When it comes to those costs, VA buyers can ask sellers to pay all of their loan-related costs. The 4 percent in concessions is an additional bonus.
Explaining the 4% VA Seller Concession Rule
VA rules say that the value of a seller concession can equal as much as 4 percent of the selling price. Again, that’s in addition to “normal” discount points and payment of the buyer’s loan-related closing costs.
For the sake of comparison, conventional loans typically allow sellers to pay 3 percent in concessions, while FHA borrowers can ask sellers to pay up to 6 percent.
Sellers are not required to offer concessions or pay any of a VA buyer’s closing costs. This is always a matter of negotiation between the two parties, and this is where having a VA-savvy real estate agent can make a huge difference. Some sellers will be more likely than others to pay concessions in order to get their home sold.
How Seller Concessions Help Homebuyers
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