The FHA, VA, USDA, and conventional mortgages (loans underwritten to Fannie Mae and Freddie Mac guidelines) permit the seller to pay a percentage of your closing and escrow costs (however, the seller is not required to pay anything toward your costs).
The seller's assist limit is based on the type of mortgage and the down payment percentage.
Each of these loan types permits the seller to pay a percentage of the buyer’s closing costs. The seller is not required to pay the buyer’s closing costs. However, the rules allow the seller to pay a percentage of the buyer’s closing costs if agreed to in the sales contract. Each mortgage "type" has its own seller assist guidelines and the limitation of the seller's paid closing costs, commonly called "seller assist".
The seller is never allowed to pay the buyer’s down payment!!!
FHA mortgage loan
The Federal Housing Administration is a home loan backed by the federal government. The FHA limits the seller's assistance (seller paid closing costs) to the lesser of 6% of the sales price or the total allowable closing costs, prepaid and escrow costs. This means that if the total settlement costs add up to 5% of the sales price, then only 5% will be permitted to be paid on behalf of the home buyer, not 6% of the sales price.
Interested Third-Party Contributions
The seller and/or third party may contribute up to six percent of the lesser of the property’s sales price or the appraised value toward the buyer’s closing costs, prepaid expenses, discount points, and other financing concessions.
Contributions from Interested Parties (Manual):
- Interested parties are sellers, real estate brokers, builders, developers, or other parties having a stake in the transaction. A payment made by an interested party, or a group of parties, toward the Borrower's origination fees, other closing expenses, and discount points is referred to as an Interested Party Contribution.
- Standard Interested Parties are permitted to contribute up to 6% of the sales price toward the Borrower's origination fees, other closing expenses, and discount points.
The 6-percentage-point restriction also includes:
- Interested party payments for permanent and temporary interest rate reductions, as well as other payment supplements; mortgage interest payments on fixed-rate mortgages;
- Mortgage payment protection insurance, as well as payment of the UFMIP
- Incentives to buy are Interested Party Contributions that exceed real origination fees, additional closing expenses, and discount points.
Contributions from interested parties that surpass 6% are considered an incentive to buy.
SOURCE: Handbook 4000.1 (page 306)
A conventional mortgage is a home loan that is not backed by the federal government. Call it your father’s mortgage (i.e. 5%, 10%, 15%, 20% down payment). If the loan is not an alphabet mortgage (i.e. FHA, VA, USDA), it’s probably a conventional mortgage. Conventional home loans are offered by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These loans are sold to home buyers and homeowners by banks and mortgage companies.
The conventional mortgage guidelines permit the seller to pay 3% of the sales price toward the buyer's closing costs when the down payment is less than 10%. For down payments of 10%-24%, the seller can pay up to 6% of the sales price. For down payments of 25% or more, the seller can pay up to 9% of the sales price.
Conventional Loan Seller Assist Limits
Maximum Seller Assist
Principal residence or second home
Less than 10% Down Payment
3% X Sales Price
10% to 24.99% Down Payment
6% X Sales Price
25% or greater
9% X Sales Price
Veteran home loan
The Veterans Administration permits the seller to pay all customary closing costs. In addition to the allowable closing costs, the seller is permitted to pay the escrow and prepaid costs up to 4% of the sales price. Read more about VA Loans
- Policy: Fees and charges, including discount points, may be paid on behalf of the borrower by the seller, lender, or any other party. Charges "made against or paid by" the borrower are prohibited under VA rules. They place no restrictions on the payment of fees and levies by other parties.
VA Seller Concessions
As defined by the Department of Veteran Affairs of November 8, 2010:
An explanation: For the purposes of this discussion, a seller's concession is anything of value added to the transaction by the builder or seller for which the buyer pays no additional cost and for which the seller is not normally expected or obligated to pay or provide.
Seller concessions include, but are not limited to:
- payment of the VA funding fee for the buyer
- payment of the buyer's property taxes and insurance in advance
- A television set or a microwave oven are examples of suitable presents.
- payment of bonus points in order to get permanent interest rate reductions
- supply of escrowed money to offer short-term interest rate reductions, and
- repayment of credit amounts or judgments on the buyer's behalf
The Issue: In certain areas, builders or sellers provide concessions as a competitive advantage. In extreme instances, the incentives may lure unsuspecting and unprepared veterans into taking out mortgages they cannot pay. The concessions may mask the veteran's inability to get the loan.
The Four Percentage Limit: Any seller concession or combination of concessions that exceed four percent of the property's established fair worth is deemed excessive and unsuitable for VA-guaranteed loans.
When calculating whether concessions exceed the four percent limit, exclude regular discount points and payment of the buyer's closing expenses from total concessions.
USDA home loan
The USDA does not impose a limit on the seller-paid closing costs, however, many lenders will unilaterally limit the seller assist to 6%.
Consult with a mortgage professional concerning limits and allowable costs paid under these mortgage programs. The seller assist cannot be used to pay the down payment . . . only closing, escrow, and prepaid costs. Read more about USDA Loans
I wanted the seller to pay 6%, but at closing, the seller only paid 5%?
It can happen. The seller is only permitted to pay your closing and prepaid expenses UP TO THE LIMIT PERMITTED BY THE LOAN PROGRAM OR THE TOTAL OF THE CLOSING AND PREPAID COST - WHICHEVER IS LESS.
For example, let's say you asked the seller to pay $6,000 or 6% of the sales price, but when the final numbers came in, the closing and prepaid expenses added up to $5,000, in this case, the seller is only permitted to pay $5,000. Remember, the extra $1,000 cannot be used for down payment. That's your investment in the purchase. That extra $1,000 goes to the seller. Be careful not to ask too much seller assist. Always consult with a mortgage professional prior to making your offer. SOURCE: USDA Frequently Asked Questions.PDF
Which is better, asking the seller to pay a seller assist or make a lower offer?
Let's run a scenario and you decide.
The following example assumes that the house is listed at $100,000 and the seller desires to net, or sell the house for $94,000. This example also assumes that the real estate taxes are $3,600 per year, and the homeowner's insurance is $480 per year.
Column 1 - Sales price of $100,000 with a 6% seller assist ($6,000) - FHA mortgage
Column 2 - Sales price of $94,000 no seller assist - FHA mortgage
As you can see, your total cash to purchase this home is less in Column 1, because the seller is paying $6,000 (6% X sales price) toward your closing costs. However, the payment is higher than in column 2 because the mortgage amount is higher.
Seller assist comparison
Loan with seller assistance
Loan without seller assistance
Seller Assist Percentage
$ - 0 -
DOWN PAYMENT (3.5%)
ESCROW & PREPAID COSTS
TOTAL PURCHASE COSTS
Less Seller Assistance
$ - 0 -
CASH REQUIRED AT SETTLEMENT*
* Closing costs are a bit lower with no seller assist
Here's the bottom line: if you make a full-price offer with the seller paying 6% toward your closing and prepaid costs, your cash requirement will be lower; but since the offer is for full price, your monthly payment will be higher than an offer at a lower sales price and no seller assist.
Final comment, the mathematics are the same with veteran’s mortgages, USDA, and conventional mortgages; regardless of which state you are purchasing in. A higher sales price with a seller assist will give you lower cash at closing, but a higher monthly payment. A lower sales price with no seller assist will increase your cash requirement at closing but lower your monthly payment.
Frequently Asked Questions About Seller Paid Closing Costs
Q. Can closing costs be financed in an FHA, VA, USDA, or conventional loan?
A. Closing costs cannot be financed
Q. Can seller concessions be used for down payment?
A. The loan programs prohibit the seller from paying the buyer's down payment.
Q. Does the FHA loan cover closing costs?
A. Closing costs are not paid by the FHA or financed in the mortgage.
Q. How do seller concessions work?
A. The seller concession must be in writing, usually in purchase contract or with an addendum. At settlement, a reduction for the seller concession will be subtracted from the sales price and the cost (credit) will be moved over to the buyer's side of the settlement sheet to reduce the buyer's cash requirement. No side deals or undisclosed concessions are allowed.
Q. How much sellers assist can I ask for?
A. Talk it over with the lender.
Q. Is it normal for the seller to pay closing costs?
A. In some areas of the county, it's normal for the seller to help with the buyer's closing costs, however, in "hot" markets, the buyer may appear marginal