One highly effective, but rarely used, a method for saving cash at the closing is to get the seller to contribute towards your closing costs. According to most conventional and standard guidelines, sellers may contribute up to 9% for conventional mortgages before it will start affecting the amount of the mortgage.
Understanding Seller Concessions
You see a house that you are willing to make an offer on listed for $160,000.00. You know that you only have $20,000 cash to work with. You would like to avoid the additional PMI payments that would come with putting down 5% as opposed to 10%. However, if you put down the entire $16,000 to obtain 10% you will have only $4,000 left over for closing costs, which you know to be around $6,000, not to mention moving expenses and furniture. Instead of coming down on their listing and bidding $150,000, you offer to take the house at $160,000 If the seller will agree to pick up all of your closing costs, up to 6% of the purchase price. This frees up your additional cash to be used for movers, furniture, etc.
For this to work, the appraisal would need to come in at $160,000.00, however it is a highly effective way to save money on your transaction costs for those that are a bit short on cash. A common practice amongst educated buyers is to wait until there has been a verbally agreed-upon price for the home and then offer to write the contract for more money, the difference of which will be given back in a seller’s concession at closing, remembering of course that the house will need to appraise for the contract price.
This chart shows the maximum allowable seller concessions for conventional mortgages
|Occupancy Type||LTV/CLTV Ratio||Maximum Seller Concession|
|Principal residence or second home||Greater than 90%||3%|
|75.01% – 90%||6%|
|75% or less||9%|
|Investment property||All CLTV ratios||2%|
One common mistake may attorneys make is writing up seller concessions in the purchase contract to be applied toward property improvements. This is not permissible with conventional mortgage guidelines since it is considered a reduction in purchase price which can affect the loan to value of the property. Within the context and guidelines of mortgage banking, seller concessions must always be included in the contract to be used toward closing costs, which includes out-of-pocket costs from the closing as well as escrows and pre-paid interest. In fact, if the concession exceeds the total closing costs, the difference must be considered a reduction in the purchase price, which consequently will affect the Loan to Value.