Knowing Seller Paid Closing Cost Limits is Important

FHA, VA, USDA, and Conventional loans allow seller paid closing costs to a limit and it is important to know the limits

Often buyers either want or need to have seller paid closing costs in order to include part or all of their costs into their mortgage.  Seller paid costs can help a buyer bring less money to closing.  Each mortgage product treats seller paid costs a little different.

Maximum seller paid costs per program type:

FHA               6%

USDA            6%  – Easy guide to search for USDA eligible properties

VA                 Maximum seller paid “concessions” for a buyer is 4% of the sales price which will allow for paying pre-paids (such as escrows and first year of insurances), paying off buyer’s debts, and paying part or all of the VA funding fee.  On top of that, VA allows for all “customary closing costs” to be paid by the buyer.  So between the two, usually all costs could be covered as long as a sufficient amount is listed in the contract.  Learn more about what the seller can pay for the Veteran here

Conventional loans (Fannie and Freddie):

• Primary residence:  3% over 90% LTV, 6% on 75.01% – 90%, 9% when 75% or less
• Secondary residence:  6% on 75.01% – 90% LTV, 9% when 75% or less
• Investment property:  2% for any LTV

FHA 203k       6%

Reverse Mortgages:  The seller may only pay closing costs that are customarily paid for by the seller and the buyer must pay all costs that are customarily the buyers.

Interesting facts are on USDA and VA, the seller may also pay off installment debt for the buyer at closing.  This can help the buyer qualify.  The seller can even pay out the remaining term on the buyer’s lease so that the buyer can purchase earlier.  This assumes that the seller contributions stay under the limit for the program type.

Notes for above:  Conventional investment property loan maximum LTV is 80%.  Maximum vacation or second home financing is 90% LTV and now 90% is available on condos too

It is very important for the buyer, the buyer’s agent, and the mortgage loan officer to coordinate before making the offer so that the appropriate amount of seller paid costs are included in the purchase contract for the buyers!

Common misconceptions we have heard by realtors and buyers with seller paid closing costs:

• On a VA loan, the seller is required to pay closing costs for the Veteran – FALSE!  The seller MAY pay up to 4% of the price in costs for the Veteran (buyer).  Someone besides the Veteran must pay for the pest or termite inspection
• The seller can pay for repairs to the home – Maybe!  The seller can only pay for repairs to the home if there is an Escrow Holdback Agreement in place, the appraiser is requiring repairs, and escrow repair is approved by underwriting
• The buyer can include closing costs into the loan without listing this on the purchase contract – FALSE most of the time!  In order for the buyer to include closing costs into their loan, the purchase contract must mention that there are seller paid costs in the purchase price.  The only exception to this is USDA.  On a USDA loan, if the property appraises for more than the purchase price, the borrower may increase their loan to cover settlement charges up to the appraised value.  The loan cannot be increased by more than the total closing costs though.  For example, if the price is $200,000 and costs are $5000 and the property appraises for $208,000, then the buyer may choose to increase the loan to $205,000 so that closing costs are included in the loan.
• The seller can pay towards the buyer’s down payment – FALSE!  The seller can never pay towards the buyer’s down payment, only towards settlement charges and/or repairs if approved by underwriting.

So before writing a contract, let’s coordinate on the seller paid costs and price up-front!

Related Resources:

• Prequalification letters and understanding the levels for each buyer
• Why do Realtors require that you get prequalified before you look at houses

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