Contrary to popular belief, seller concessions are not strictly for the benefit of the buyer – they help the seller as well. The way this works is the buyer is happy because he can purchase the home he really wants to purchase and the seller is happy because he is able to sell his home. This is the incentive for the seller to provide certain costs for the buyer even on a VA loan.
What are Seller Concessions?
Seller concessions might be different than you anticipate. For example, they are not the same as closing costs that the seller pays for the buyer. Closing costs actually have no maximum requirement when the seller wants to help. This means the seller can help with fees such as title fees, appraisal, discount points, processing, and underwriting fees without any limits.
If you go beyond those fees, this is when the seller concessions come into play. If the seller decides that he wants to help a borrower pay for any of the following, they meet the seller contribution guidelines:
- Escrow money for taxes and/or insurance
- Paying for the first year of taxes and/or insurance
- Covering the VA funding fee
- Repairs that the buyer wants done but that are not required by the appraiser for VA approval
- Rate buy down fees
How Much Can the Seller Contribute?
When you are talking about actual seller contributions according to the list above, the seller cannot contribute more than 4% of the sales price or the appraised value, whichever is lower. Let’s look at an example regarding how this would work.
Joe plans on purchasing a home that is selling for $200,000. The appraised value came back at $200,000 as well. Joe does not have the money to cover the funding fee of $4,300 (2.15% of the loan amount). The seller does not want to lose the contract on his house, so he agrees to pay the funding fee at the closing. The funding fee is less than 4% of the price of the house, so it is allowed under the VA guidelines.
If Joe were to ask that the seller also help him get his interest rate down because he cannot afford the high interest rate the lender is quoting him, the seller could also contribute to that. He has $3,700 left in allowed expenses before the VA does not approve the loan.
How Sellers Benefit
It might be hard to see how sellers benefit by contributing to the buyer’s costs when it costs the seller money to sell his home, but the benefits are there. If a seller is willing to provide sellers concessions on their home, they are enticing buyers to look at their home. If there was a home for sale down the street that was identical to another home, but that seller was not willing to contribute to the buyer’s costs, the home would seem less appealing.
Sellers can make up for the costs they agree to pay with a slightly higher sales price. As long as the value of the home comes back as high as the sales price, the seller has some wiggle room in helping the buyer purchase the home.
Sellers really are in a good position when it comes to VA funding because they do not have a limit on the amount of the actual closing costs they can cover as well as the 4% allowed contributions regarding the other costs. In the end, any seller willing to accept VA financing and provide seller concessions really is ahead of the game in the real estate market.