Seller concessions are dollars the seller agrees to pay toward the buyer's costs at closing. Lenders also call them interested party contributions, because the builder or a real estate agent can make them too. In a Florida contract they usually show up as a seller credit of a set dollar amount or a percentage of the price.
The caps by loan program
- FHA: up to 6% of the sales price, for closing costs, prepaids, discount points and the upfront mortgage insurance premium.
- VA: VA puts no cap on seller credits for your normal closing costs, and on top of that allows concessions of up to 4% of the home's reasonable value, such as paying the funding fee, prepaying your homeowners insurance or paying off a debt.
- Conventional: 3% with less than 10% down, 6% with 10% up to 25% down, and 9% with 25% or more down, measured on the lower of the price or the appraised value. Investment properties are held to 2%.
- USDA: up to 6% of the sales price.
A commission the seller customarily pays to your buyer's agent stays outside the FHA 6%. On FHA, any seller money above 6% becomes an inducement to purchase, and HUD subtracts it from the price before the loan amount is set.
Pricing the credit into the offer
Sellers think in net proceeds. A buyer who needs help with costs can often get it by offering a higher price with a credit, so the seller nets the same amount.
Take an FHA buyer looking at a home the seller wants to net $340,000 on, at a 5.75% rate on a 30-year fixed.
| Offer A | Offer B | |
|---|---|---|
| Price | $340,000 | $350,000 |
| Seller credit | $0 | $10,000 |
| Seller's net before their own costs | $340,000 | $340,000 |
| Down payment, 3.5% | $11,900 | $12,250 |
| FHA base loan | $328,100 | $337,750 |
Offer B saves the buyer $10,000 in closing costs and adds $350 to the down payment, so the buyer keeps $9,650 more cash. The base loan grows by $9,650. With the 1.75% upfront premium financed, that's $9,818.88 more borrowed, which adds $57.30 a month in principal and interest and $4.42 a month in annual mortgage insurance, about $61.72 a month in all. The $10,000 credit is well under the 6% cap of $21,000 at this price.
This only works when the home appraises at the higher price. If the appraisal lands at $340,000, the loan is figured on $340,000 and the buyer covers the difference or goes back to the seller.
Getting the number right
Ask for a dollar figure that matches your estimated closing costs and prepaids, with a little room for the final figures. Any credit beyond your actual costs goes unused. Stay under the program's cap as well: on Conventional and FHA loans, seller money above the cap is subtracted from the price before the loan is set, which cuts the most you can borrow.
Run the price and the credit through the cash to close calculator before the offer goes in. If you want the exact credit figured on a specific home, call AAA Capital Funding at 888-601-8344 and we'll size it to your costs.