The seller, or any other third party may not contribute to the buyer’s down payment, but Loan programs allow them to contribute towards the buyer’s closing costs. Each program has a specific set of guidelines.
- FHA allows sellers to pay up to 6% of the purchase price
- Conventional loans allow from 3%-9% based on the amount of down payment the borrower makes on a primary residence and 2% if the property is being purchased as an investment.
- VA doesn’t have a restriction on closing costs, but limits concessions to 4% for items not considered costs,
Typically seller concessions are outlined in the initial purchase contract and made a part of the loan transaction from the start. However, seller concessions can be added to the contract after inspections and in lieu of seller making repairs.
The lender should be made aware of the concessions immediately. The underwriter needs to confirm that the new concessions are within the guidelines for the particular product. If this change is made later in the contract, it could cause delays to an on-time funding.
Also be aware that if the contract states the concessions are in lieu of certain repairs, the underwriter may call for a more thorough examination of the property to ensure the repairs are not a detriment to the collateral.
Concessions that exceed the current amount of fees can also be used to buy the rate down. This has an impact on the lenders’ disclosure requirements and could also cause a delay if not made aware early in the process.
If the amount of seller concessions exceeds the closing costs, the excess is returned to the seller. The buyer cannot keep these funds!