If you’re purchasing a home using your VA loan benefits, it will be advantageous to know and understand what seller concessions are and how they relate to your VA loan. Understanding what a seller concession is is actually pretty simple. A seller concession is a way that a seller can “sweeten the deal” when selling a home. Seller concessions on a VA loan can potentially save you thousands of dollars.
Seller concessions are classified based on how much value they have, and under what circumstances they were provided. The VA defines a seller contribution as, “anything of value added to the transaction by the builder or seller for which the buyer pays nothing additional and which the seller is not customarily expected or required to pay or provide.” Seller concessions on a VA loan are not allowed to exceed 4 percent of the home’s selling price. But to count as a seller concession it must to be something that the seller is “customarily expected or required to pay or provide”, so only things that could be considered out of the ordinary count towards that 4%.
Compared to conventional loans and FHA loans, the 4 percent limit is a good place to be. On a conventional loan, the limit is 3% while on an FHA loan the limit is 6%. The reason that a 4% concession limit is a good place to be is because it allows there to be significant help from the seller, but it also protects the buyer from finding themselves bribed into a mortgage that they can’t really afford. The percent limit on FHA loans is expected to be reduced soon for that very reason. But all this begs the question, why on earth would a seller want to throw in potentially thousands of dollars in concessions to the buyer?
It certainly isn’t done lightly. A seller might give concessions to speed up a sale when they’re in a hurry to get the property sold. Concessions speed up the sale by lowering the effective price of the property. Concessions can be an effective weapon for a seller when they’re in a tough market that’s got a lot of sellers and not many buyers. Thus, you can expect, that in areas and times when there are a lot of buyers and not many sellers, seller concessions are pretty hard to get. As mentioned before, seller concessions only include things that can be considered out of the norm for sellers to provide in the closing of a sale. So what things can be considered seller concessions? Let’s go over a few.
A semi-common one is a seller paying for the buyer’s VA funding fee. This amount can be anywhere from 2.5% to 3.3% and is certainly not chump change. If you find a seller willing to make this concession, it’s best to consult with a lender to find out if it really is a great deal or if the home is outside of your safe price range. The seller can also offer to cover or prepay the buyer’s property taxes and insurance payments on the home. This can be a nice incentive and is an effective concession for sellers when utilized. Often seller concessions come in the form of leaving furniture or appliances such as a nice television set or a refrigerator. These concessions are usually done because the seller would like to get rid of them anyway, and if they can throw it in and close a sale faster, it’s often worth it.
A seller can also pay extra points towards providing a permanent interest rate buydown, or providing escrowed funds to provide a temporary interest rate buydown. These types of concessions can be very valuable because their dollar value (under 4% of the price of the home) can lead to a much higher amount by the time the loan has gone a few years with a lower interest rate. A seller will also sometimes offer to pay off something else that the buyer is making monthly payments on to make the mortgage more reasonable. Something like a $200 car payment could make or break a sale on a home, and might be worth the seller dropping $8000 to cover the remaining balance on an auto loan for the buyer.
A last note of caution, if you have a seller that is trying to offer you excessive concessions, it could be a red flag that the house you are purchasing is being sold at an above-market value and they’re still getting the better end of the deal even after all of the concessions. When contemplating seller concessions, make sure to stay in close consultation with your lender.