If you can’t afford the closing costs on your loan, you aren’t alone. Many homebuyers can’t, which is when seller assist can help. You may also know it as seller concessions. It’s all the same thing – the seller helps you with your closing costs.
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Typically, you negotiate seller assist when you negotiate the price of the home and sign the contract. What the seller agrees to do is help you cover your closing costs. Knowing how seller assist works can help you understand the process.
Increasing the Purchase Price
In essence, seller assist allows you to increase the purchase price of the home, which in turn increases the loan amount. While it seems like the seller is giving you money, you actually take a larger loan amount. This is only possible if the value of the home supports the larger loan.
Here’s an example:
You agree to buy a home for $150,000. You decide that you don’t have the money for the closing costs, though, and need a little assistance. The seller agrees to credit you $5,000 at the closing. You raise the contract purchase price to $155,000. The lender bases your loan amount on the $155,000 purchase price. Let’s say you were using FHA financing. You must put down 3.5%. The lender then gives you a loan for $151,125. At the closing, the seller credits you the $5,000, which deducts $5,000 from what you’d need to close on the loan.
Essentially, your monthly payments are higher as a result of the seller credit. If it’s the only way you can buy the home, though, it may be your only option.
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The Seller Assist Rules
Each loan program has a maximum amount that the seller can help you with when covering your closing costs. The limit is in place to avoid ‘bribing’ or an inducement to purchase the home. For example, if a seller agrees to pay all of your closing costs, rather than abiding by a limit, you may feel like you have to buy that home because it will cost you a lot less out of your own pocket. The limits help keep things in perspective.
Conventional loans allow seller assist limits of 3% for borrowers that put down less than 10% for a down payment and 6% for borrowers that make more than a 10% down payment. The FHA allows sellers to provide up to a 6% seller credit. VA loans allow as much as a 4% seller concession, but they allow sellers to cover 100% of the buyer’s closing costs.
The program limit is based on the purchase. If you are securing an FHA loan, the seller could provide you with a seller credit equal to 6% of the purchase price.
The Home Value
The value of the home also controls how much seller assist you can obtain. If the value of the home isn’t high enough to support the higher purchase price, you won’t be able to take it. The lender needs to make sure there is enough collateral in the home in order for them to write the loan. For example, if with the seller assist your loan would be $205,000, but the home is only worth $195,000, the lender can’t write a loan for more than $195,000. In most cases, the lender will also require a down payment, making the maximum loan amount even lower.
The seller assist can be a great resource if you can’t afford all of your closing costs or you need a credit to fix something on the home. Assuming the home is in decent condition and passes the appraisal and is worth enough to cover the seller assist, you can buy the home you want with help from the seller.