Published on August 4, 2011
All About Seller Contributions
When the seller of a property agrees to contribute money toward the buyer’s closing costs, this is called a “seller contribution.” This is generally done to assist the buyer in closing the loan if they do not have sufficient funds to cover both the down payment and the closing costs. Seller contributions are generally permitted by most lenders, as long as the details are fully disclosed within the sale agreement and the total contribution does not exceed the acceptable limit for that specific loan program. The amount of the contribution can range from 3% to 6% of the purchase price, depending on the lender’s guidelines, and it cannot exceed the actual amount of closing costs in most cases.
A seller contribution can be a useful bargaining chip to the buyer. Note that the seller’s willingness to contribute will often be driven by current market conditions. If the buyer does not have sufficient funds to pay both the closing costs and the down payment, the seller can increase the cost of the home and make an equal contribution toward closing costs. This is only acceptable if the increased sales price still falls within the appraised value. This money can also be used creatively to pay points to cover closing costs, which are then tax deductible for the buyer.
In a Conventional loan scenario, the seller is permitted to pay only non-recurring closing costs. This means the buyer is still responsible for any fees that must be paid in advance such as hazard insurance or mortgage insurance. However, given the seller is willing to make a contribution, this could free up additional funds for down payment on the buyer’s side, and possibly allow the buyer to negotiate a better interest rate or eliminate the need for private mortgage insurance entirely.
The seller may contribute up to 6% of the loan amount if the buyer makes a down payment of 10% or more, and 3% if the buyer is making a down payment of less than 10%. Again parties must comply with all lender guidelines.
Veterans or those in active duty can seek to qualify for the “VA No No” program, in which both the down payment and the closing costs are paid for by the seller. In this case, the lender is insured against lost directly by the Veteran’s Administration. In general, lenders will finance up to four times the Veteran’s entitlement without asking for a down payment as long as the current income, credit rating and appraisal are acceptable. To find out more about eligibility for VA financing, visit http://www.homeloans.va.gov.
FHA insured loans permit the seller to pay all of the closing costs, but the buyer must make a 3.5% contribution in some way, whether it is toward down payment, closing costs or pre-paid items. It is permissible for that 3.5% to come from gift money from a relative. FHA guidelines vary by state, and we can provide you with additional information on FHA loan limits for this area.