Utilizing Seller Concessions in a Buyers Market.

One of the most confusing part of the home buying process for new homeowners is the concept of seller paid closing costs or seller concessions. Seller paid closing costs allow for less out of pocket expense for the home buyer, but are rarely truly seller paid. Seller paid costs are actually buyer borrowed. Regardless, there is still a great benefit to having them.

Let's examine real quickly how they work. Assuming an asking price of $100,000 with the buyer using an FHA loan that has a maximum of 6% in seller paid closing costs, a buyer could offer $106,000 with $6,000 towards closing costs. The seller is going to net out at the same amount, so they usually don't care and it helps the buyer close easier. The buyer could also offer the asking $100k with $6,000 going towards closing costs netting the seller $94,000. Considering the way the real estate market is, that could easily be accepted or there may be further negotiation.

What can closing costs go towards? Title fees, property taxes, loan costs including lender fees, origination and rate buydown, homeowners insurance, up front mortgage insurance premiums and VA funding fees. They can't go towards a required down payment.

Unused closing costs go back to the seller. Sometimes on lower priced properties the lender maximums can't be used up. A savvy buyer should lower their offer by the unused amount. On purchases, overages of seller paid concessions can never be paid to the buyer as cash back.

Why not just pay the closing costs? Lenders want to know where the money is coming from and in today's marketplace those funds have to be sourced (where did the money come from) and seasoned (how long has the money been there). If you don't have the funds already in place, or need to use your savings for a down payment seller paid closing costs are a great way to get the loan approved.

Lenders limit the maximum amount concessions can be. For VA loans, the number is four percent...FHA mortgages are 6%. Conventional loans vary dependent upon the lender. Be sure to check with your lender when you tender the offer. Closing costs must be negotiated at the time of the offer, though it's possible to go back and amend the contract.

Seller concessions are not a right. Remember buying a home is a negotiation and you can succeed more often by presenting an offer that benefits both sides. Don't rake the seller over the coals on price and then add in seller paid concessions. You may get the offer accepted, but if problems develop down the road like you need to extend the closing, you may find the seller to be less than accommodating.

For potential homeowners who want to minimize their out of pocket expenses, negotiating seller paid closing costs is a great way to do it.

Labels: closing costs, fha loan, VA loans




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