Lenders set limits on seller contributions
Lenders limit seller credits, and one reason is that concessions may artificially inflate home values. Negotiations tend to increase the price of the home by at least a fraction of the seller concession. However, the home’s actual value may not reflect the higher sales price, which puts the lender at risk of loaning more than the home is worth.
So while you may be willing to pay for the buyer’s closing costs, lenders have their own requirements. Depending on the buyer’s loan type, sellers are limited in how much they can contribute.
| Loan type | Combined loan-to-value ratio | Maximum seller concession (percentage of purchase price) |
| Conventional | 90% and above | 3% |
| 75.01% to 90% | 6% | |
| 75% or less | 9% | |
| FHA | N/A | 6% |
| VA | N/A | 4% |
| USDA | N/A | 6% |
Conventional concession limit: Conventional guidelines set by Fannie Mae and Freddie Mac limit seller contributions based on the buyer’s combined loan-to-value (CLTV) ratio. When a buyer applies for a loan with a CLTV of 90% or above on their personal home or second property, the seller can contribute up to 3% of the purchase or appraised value, whichever is lower.
If the seller’s contribution exceeds the limit, the lender reduces the purchase price by the amount above the limit. Doing so recasts the CLTV, resulting in a reduced loan amount.
FHA concession limit: According to Housing and Urban Development (HUD) guidelines, seller credits can’t exceed 6% of the purchase price or appraised value, whichever value is less. The 6% limitation includes any inducements the seller offers the buyer to purchase. Examples of seller inducements include decorating allowances, repair allowances, and moving costs.
VA concession limit: The Department of Veterans Affairs limits seller concessions to 4% of the property’s value. The 4% limit excludes “normal discount points and payment of the buyer’s closing costs in total concessions.”
USDA concession limit: The USDA loan program allows sellers to contribute up to 6% of the purchase price toward the buyer’s closing costs. The limit doesn’t include prepaid items paid by the lender through premium pricing and an upfront guarantee fee.
Alternative ways to help buyers with home purchase costs
Sellers can attract buyers and increase their home’s value without covering all closing costs. Offering to cover part of the expenses or providing incentives like home warranties or prepaid costs can make the property more appealing.
- Offer a home warranty: This covers potential repairs for the first year, giving buyers peace of mind.
- Cover HOA fees for a year: This reduces the buyer’s initial expenses, making the home more affordable upfront.
- Provide repair credits: With this, the buyer can address necessary fixes without requiring you to complete renovations.
- Include appliances: Offering a refrigerator, washer, dryer, or other essentials can be an attractive bonus.
What you should consider when negotiating a seller credit with the buyer
When you’re negotiating with a buyer who’s asking you to pay for their closing costs, keep these tips in mind:
Make sure the credit amount is clearly spelled out on your purchase agreement. If you agree to pay for the buyer’s closing costs, agree to either a fixed dollar amount or percentage of the purchase price — not an ambiguous amount such as “buyer’s closing costs.”
Limbird also advises sellers to pay close attention to the contract’s language. She recounts a transaction when the contract verbiage listed the seller credit as 3% of the total closing costs, not 3% of the purchase price.
The difference? While a percentage of closing costs may total a few hundred dollars, a percentage of the purchase price equals thousands of dollars. As the sale neared closing, the seller (who happened to be an attorney) insisted on crediting the amount as stipulated on the contract, which was thousands of dollars less than what the buyer had intended.
While the seller benefited in this instance, ensuring clarity in your contract verbiage could save you from unwelcome surprises, such as inadvertently agreeing to a larger credit than you intend.
If you max out your seller credit, you won’t be able to offer additional credits for repairs down the road. After a buyer and seller both sign off on a purchase agreement, Limbird reminds her clients that contract negotiations aren’t quite over. Most purchase agreements include an inspection contingency or a time period when the buyer has the option to inspect the property for deficiencies.
If issues arise later during the inspection period, such as a malfunctioning water heater, you may agree to credit the buyer for certain repairs. However, if you’ve already agreed to the maximum seller credit toward closing costs, the lender won’t allow an additional repair credit. In order to save the sale, you may need to repair the faulty unit prior to closing.
And above all, never write a check directly to the buyer to get around lender-imposed limitations. “No […], you can’t can’t do that,” emphasizes Limbird. “Lenders consider that fraud to be giving the buyer money outside of closing.”
Don’t forget — you still have to pay for seller closing costs. If you find yourself homing in on buyer closing costs, don’t forget that you’re still on the hook for the seller closing costs. Along with paying the estimated 2 to 3% in buyer fees, adding seller fees of 6 to 10% can make a substantial dent in your bottom line.
When negotiating an offer that includes a seller credit, ask your real estate agent for a seller net sheet that details your estimated net proceeds, or the amount of money you’ll walk away with after selling your home.
Are there disadvantages to paying for the buyer’s closing costs? Maybe — but sellers could still benefit
While there may be drawbacks to paying for the buyer’s closing costs — such as risking a low appraisal or netting less for your home sale — agreeing to pay for closing costs can have an upside. If you’re struggling to find a buyer in a down real estate market, offering to pay for closing costs could entice a buyer.
On the other hand, if you receive ten offers for your home, you can probably avoid seller concessions altogether. In a seller’s market, “a lot of sellers have their pick of offers,” says Limbird. And paying for the buyer’s closing costs? “It’s probably not the best option for them.”
Header Image Source: (Chalo Garcia / Unsplash)
