Seller concessions can significantly reduce the out-of-pocket expenses for a homebuyer, making the dream of homeownership more affordable. However, understanding the nuances of VA seller concessions can be tricky.
What exactly are seller concessions, and how do they work with a VA loan? This article explains just how VA seller concessions function, the rules governing them, and how they differ from closing costs.
Key Points:
- Seller concessions are costs that a seller agrees to pay on behalf of the buyer.
- VA seller concessions can cover certain costs but differ from closing costs.
- The VA sets a “4% rule” on how much a seller can contribute in concessions.
- VA seller concessions can include things like prepaid taxes, insurance, and even paying off debts to qualify for the loan.
What Are Seller Concessions?
Seller concessions, sometimes known as seller contributions, are costs that the seller agrees to cover on behalf of the buyer during a home purchase. When a seller agrees to concessions, they may commit to covering specific types of closing costs, an exact dollar amount, or offer to cover a percentage of the costs.
These concessions can include various fees and charges that would otherwise be the buyer’s responsibility. The primary purpose of seller concessions is to help reduce the buyer’s financial burden, making it easier to afford the upfront costs associated with buying a home.
For veterans and active duty servicemembers using a VA loan, seller concessions can be a powerful tool. They can help cover everything from prepaid expenses, such as homeowners insurance and property taxes, to non-traditional expenses like paying off a buyer’s collections or judgments so they can qualify for their VA loan.
VA Seller Concessions vs. Closing Costs
It’s important to differentiate seller concessions and closing costs, as these terms are often mistakenly considered interchangeable. While seller concessions are negotiated, closing costs are standard expenses that every homebuyer must address when purchasing a home.
- Seller Concessions: A seller concession refers to any expense the seller covers that they are not obligated to pay. These are negotiated costs that help the buyer reduce out-of-pocket costs. Seller concessions typically include various fees, such as tax stamps, attorney fees, title insurance, loan origination fee and others. However, VA seller concessions can go beyond just the necessary fees for closing the loan. These can include gifts (such as kitchen appliances, furniture, home goods, etc.), prepayment of the buyer’s property insurance and taxes, and even paying off credit balances or other debts on behalf of the buyer.
- Closing Costs: The term “closing costs” is a broad label encompassing any fees or expenses necessary to obtain your mortgage. These are mandatory fees associated with finalizing a mortgage, which include things like loan origination fees, appraisal costs, title insurance, credit report fees and attorney fees. Closing costs can also refer to third-party charges like property taxes and homeowners insurance.
It’s important to note that there is a cap on what’s known as seller concessions when it comes to VA loans.
VA guidelines allow sellers to cover closing costs that are reasonable and customary, which do not fall under the 4% cap. This is different from VA loan closing costs, which sellers can also contribute to, but the 4% rule only applies to concessions – not to closing costs.
This includes loan charges, title fees, recording fees, and real estate administrative fees.
How Seller Concessions Work
Seller concessions are optional and are negotiated between the buyer and seller. In a competitive market, it may be harder to convince a seller to offer concessions. But, in other markets, especially where sellers are eager to make a deal, you may be able to negotiate substantial help with certain costs.
Here are some examples of fees that could be covered by seller concessions on a VA loan:
- Prepaid property taxes
- Homeowners insurance premiums
- Funding prepaid interest on the VA loan
- Paying off collections, judgments or other debts to help the buyer qualify for the loan
Important Note:
The seller is not obligated to offer concessions, so it’s crucial to negotiate this point carefully during the home-buying process. But, it’s also important to know which costs are eligible for concessions.
What isn’t considered a seller concession
Standard closing costs and points tied to the current market interest rate aren’t classified as concessions.
For instance, if the market rate is 7% with two discount points, the seller covering those two points wouldn’t count as a concession. However, if the seller pays five points, the additional three points would be considered a concession.
Title insurance, which is mandatory for lenders, is also not generally considered a concession. In some states, attorney fees may be covered by seller concessions, depending on the terms negotiated.
The 4% Seller Concession Rule
The VA’s 4% rule is a key regulation to keep in mind when negotiating seller concessions.
According to the VA’s lender handbook, “any seller concession or combination of concessions that exceeds 4% of the established reasonable value of the property is considered excessive, and unacceptable for VA loans.”
The rule states that a seller can contribute up to 4% of the loan amount toward concessions. A common misconception is that the VA restricts seller contributions to closing costs that do not exceed 4%, but this limit mainly applies to certain specific concessions.
Here’s what the 4% rule means in practice:
- The seller can only pay concessions that are equal to or less than 4% of the home’s selling price, which is in addition to normal discount points and payment of the buyer’s loan-related closing costs.
- The 4% limit only applies to specific seller concessions, like paying for prepaid property taxes or helping the buyer pay off debt. It does not include closing costs that the seller might cover, such as appraisal fees or title insurance, which are separate.
For comparison, conventional loans often limit seller contributions to between 3% and 9% of the loan amount, depending on the buyer’s down payment. FHA loans typically allow seller contributions up to 6%.
While the 4% limit on VA loans may seem restrictive, it is designed to help veterans and active duty servicemembers avoid paying unnecessary fees while keeping the focus on essential concessions that benefit the buyer.
Important Note:
Any costs considered normally paid by the seller in your market do not count toward seller concessions.
For example, in Maryland sellers generally cover expenses such as transfer taxes (either partially or fully, depending on the buyer’s status), real estate agent commissions, title insurance (commonly paid by the seller), a portion of attorney fees, and any HOA transfer fees. Recording fees are typically shared between the buyer and seller, depending on the terms of the contract.
Examples of Seller Concessions at Work
To better understand how seller concessions can benefit homebuyers, let’s look at a few hypothetical scenarios.
Scenario 1: Covering Prepaid Expenses
A veteran is purchasing a home for $300,000 with a VA loan. The veteran negotiates for the seller to cover prepaid expenses like property taxes and homeowners insurance for the first year, totaling $6,000. In this case, the seller’s concessions are within the 4% limit, as 4% of $300,000 is $12,000. The buyer is able to save on these upfront costs while still covering their required closing costs.
Scenario 2: Paying Off Debt to Qualify
An active duty servicemember is looking to buy a home for $450,000 but has a collection account for $7,000 that could disqualify them from being approved for a VA loan. The servicemember negotiates with the seller to pay off the $7,000 collection as a concession. Since 4% of $450,000 is $18,000, the $7,000 concession easily fits within the allowed limit, helping the buyer qualify for the loan.
In all of these scenarios seller concessions are separate from closing costs, which the buyer is responsible for unless it is negotiated that the seller will cover some (or all) of these costs, as well.
Maximizing Your VA Loan Benefits
By understanding the ins and outs of VA seller concessions, you can better negotiate your home purchase, making buying a house more affordable, as well as maximize the benefits of your VA eligibility.
Be sure to speak with a VA-savvy real estate agent, as well as a knowledgeable VA lender, to discuss how seller concessions can be factored into your home purchase.
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