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Can the Seller Pay My Closing Costs? What is a Seller Assist?



What's a Seller Assist?

Man with pockets turned inside outWhat's the maximum seller assist for FHA, VA, USDA and conventional mortgages?

Can the seller pay my closing costs?

Can the seller pay my down payment?

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 assist limit is based on the type of mortgage and the down payment percentage.

There are four primary mortgage choices: Read more

  • FHA, which stands for Federal Housing Administration
  • VA, a loan reserved for eligible veterans
  • USDA, United States Department of Agriculture and
  • Conventional mortgages. A conventional loan is a mortgage underwritten to either the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Association (Fannie Mae).

No cash signEach of these loan types permit 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 by the sales contract. Each mortgage “type” have their own seller assist guidelines and the limitation of the seller paid closing costs, commonly called “seller assist”.

The seller is never allowed to pay the buyer’s down payment ! ! !

FHA Mortgage Loan

Family standing in front of their new homeFHA LOAN: The Federal Housing Administration limits the seller assist to the lesser of 6% of the sales price or allowable closing costs, prepaid and escrow costs.

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. The six percent limit also includes

  • third party payment for permanent and temporary interest rate buy downs and other payment supplements
  • payments of mortgage interest for fixed rate mortgages
  • mortgage payment protection insurance, and
  • payment of the upfront mortgage insurance premium (UFMIP).

Note: Contributions exceeding six percent are considered inducements to purchase. Reference: For information on inducements to purchase, see HUD 4155.12.A.4.

Fannie Mae & Freddie Mac

CONVENTIONAL MORTGAGE: Think of Fannie Fannie Mae and Freddie Mac as your father’s mortgage Nice house with shade trees in the front yard (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 Fannie Mae or Freddie Mac loan, also known as a “conventional mortgage”.

The “agencies” permit the seller is to pay 3% of the sales price when your 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. SOURCE: 2012 Fannie Mae Selling Guide

Conventional Loan Seller Assist Limits
Occupancy TypeDown PaymentMaximum Seller Assist
Principal residence or second homeLess than 10% Down Payment3% X Sales Price
10% to 24.99% Down Payment 6% X Sales Price
25% or greater9% X Sales Price

Veteran Home Loan (VA)

VA Logo

VA MORTGAGE: The Veterans Administration permits the seller to pay all customary closing costs. In addition the allowable closing costs, the seller is permitted to pay the escrow and prepaid costs up to 4% of the sales price.

 a.  Policy: The seller, lender, or any other party may pay fees and charges, including discount points, on behalf of the borrower. VA regulations limit charges “made against or paid by” the borrower. They do not limit the payment of fees and charges by other parties.

VA Seller Concessions
Change Date - November 08, 2010, Change 15 - This section has been updated to make minor grammatical edits.

a.  Definition
For the purposes of this topic, a seller concession is anything of value added to the transaction by the builder or seller for which the buyer pays nothing additional and which the seller is not customarily expected or required to pay or provide.

b.  Seller Concessions - Seller concessions include, but are not limited to, the following:

  • payment of the buyer’s VA funding fee
  • prepayment of the buyer’s property taxes and insurance
  • gifts such as a television set or microwave oven
  • payment of extra points to provide permanent interest rate buy downs
  •  provision of escrowed funds to provide temporary interest rate buy downs, and
  •  payoff of credit balances or judgments on behalf of the buyer.

Seller concessions do not include payment of the buyer’s closing costs, or payment of points as appropriate to the market. Example:  If the market dictates an interest rate of 7½ percent with two discount points, the seller’s payment of the two points would not be a seller concession.  If the seller paid five points, three of these points would be considered a seller concession.

c.  The Problem - In some localities, builders or sellers offer concessions as a competitive tool.  In extreme cases, the concessions may entice unwary and unqualified veterans into home mortgages they cannot afford.  The concessions may disguise the veteran’s inability to qualify for the loan.

d.  The Four Percent Limit - Any seller concession or combination of concessions which exceeds four percent of the established reasonable value of the property is considered excessive, and unacceptable for VA-guaranteed loans. 

Do not include normal discount points and payment of the buyer’s closing costs in total concessions for determining whether concessions exceed the four percent limit. SOURCE: Department of Veteran Affairs

USDA  Home Loan

USDA Logo 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.

I wanted the seller to pay 6%, but at closing the seller only paid 5%?

Home buyers closing on mortgage loanIt 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 making 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 homeowners 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 comparisonLoan with seller assistance Loan without seller assistance
SALES PRICE $100,000.00 $94,000.00
Seller Assist Percentage 6% $ - 0 -
CLOSING COSTS
Appraisal Fee $300.00 $300.00
Credit Report $18.00 $18.00
Transfer Tax $1,000.00 $940.00
Flood Certification $18.00 $18.00
Notary Fee $25.00 $25.00
Recording Fees $120.00 $120.00
Settlement Fee $125.00 $125.00
Title Endorsement $150.00 $150.00
Title Insurance $858.75 $822.75
TOTAL CLOSING COST $2,614.75 $2,518.75
 
ESCROW PRORATIONS
Per diem Interest $484.22 $455.17
Home Insurance Policy $480.00 $480.00
Home Insurance Escrow $80.00 $80.00
MIP | PMI ESCROW $88.46 $83.15
Real Estate  Tax Proration $3,600.00 $3,600.00
Financed FHA or VA Funding Fee $1,688.75 $1,587.43
TOTAL PREPAID and ESCROW COSTS $6,421.43 $6,285.74
 
MONTHLY MORTGAGE PAYMENT
Principal and Interest $588.69 $553.37
Homeowners Insurance $300.00 $300.00
Real Estate Taxes $40.00 $40.00
MIP/PMI $44.23 $41.58
MONTHLY PAYMENT $972.92 $934.95

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.


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