Each loan type has slightly different rules when it comes to seller contributions.
Fannie Mae and Freddie Mac are the two rule makers for conventional loans. They set maximum seller paid closing costs that are different from other loan types such as FHA and VA.
While seller paid cost amounts are capped, the limits are very generous.
For all FHA loans, the seller and other interested parties can contribute up to 6% of the sales price or toward closing costs, prepaid expenses, discount points, and other closing costs.
If the appraised home value is less than the purchase price, the seller may contribute 6% of the value.
The seller may contribute up to 4% of the sale price, plus reasonable and customary loan costs on VA home loans. Total contributions may exceed 4% because standard closing costs do not count toward the total.
USDA loan guidelines state that the seller may contribute up to 6% of the sales price toward the buyer’s reasonable closing costs.
Seller paid costs fall within a broader category of real estate related funds called interested party contributions or IPCs. These costs are contributions that incentivize the home buyer to buy that particular home. IPCs are ok up to a certain dollar amount, but above that they are not allowed.
Who is considered an interested party? Your real estate agent, the home builder, and of course the home seller. Even funds from down payment assistance programs are considered IPCs if the funds originate from the seller and run through a non-profit.
Anyone who might benefit from the sale of the home is considered an interested party, and their contribution to the buyer is limited.
Mortgage rule makers such as Fannie Mae, Freddie Mac, and HUD aim to keep the housing market fair and keep values and prices sustainable.
Seller contributions may not be used to help the buyer with the down payment, to reduce the borrower’s loan principal, or otherwise be kicked back to the buyer above the actual closing cost amount.
While seller contributions are limited to actual closing costs, you can constructively increase your closing costs to use up all available funds.
Imagine the seller is willing to contribute $7,000, but your closing costs are only $5,000. A whopping $2,000 is on the line. Use it or lose it. In this situation, ask your lender to quote you specific costs to lower the interest rate. You could end up shaving 0.125%-0.25% off your rate using the excess seller contribution.
You can also use seller credits to prepay your homeowners insurance, taxes and sometimes even HOA dues. Ask your lender and escrow agent if there are any sewer capacity charges or other transfer taxes or fees that you could pay for in advance. Chances are there is a great way to use all the money available to you.
All government-backed loan types allow you to prepay funding fees with seller contributions.
FHA. FHA loans require an upfront mortgage insurance payment equal to 1.75% of the loan amount. The seller may pay this fee. However, the entire fee must be paid by the seller. If you excess seller credit, but not enough to cover the entire upfront fee, you cannot use the funds toward the fee.
VA. The seller can pay all or part of upfront fee of 2.15% – 3.3% of the loan amount. The fee counts towards VA’s 4% maximum contribution rule.
USDA requires an upfront guarantee fee of 2.0% of the loan amount. The buyer can use seller contributions to pay for it.
Seller contributions and other interested party credits reduce the amount of money it takes to get into a home.
Zero-down loans such as USDA and VA require nothing down. However, using these loans involves closing costs so you can be prepared. A seller credit can remove the closing cost barrier and help buyers get into homes for little or nothing out-of-pocket.
To see if you qualify to buy a home with zero down and low out-of-pocket expense,
Many home shoppers are surprised that they not only qualify, but initial homeownership costs are much lower than they expected.