What Are Seller Concessions or Contributions?
Many people buying a home may not know about seller concessions, also known as seller contributions. The concept is basically this: The home buyer must pay for certain home financing costs, but an agreement can be made between the buyer and seller where the seller pays for those costs on the behalf of the buyer. These costs are paid when you close your mortgage (hence, they are referred to as "closing costs") and can include, but are not limited to:
- Discount points
- Fees for pulling credit
- Title insurance
- Processing fees
- Attorney's fees
- Appraisal fees
- Origination fees
- Inspection fees
- Transfer taxes
- Real estate taxes covering any period after the closing date
- Interest charges and hazard insurance covering any period after the closing date
- Homeowner association dues
The amount of the fees charged can vary by geographic location and depends on what needs to be done. For example, some states require an attorney to review the loan documents and conduct the loan closing, some don't.
But the whole thing sounds counter-intuitive, doesn't it? Why would anyone selling a home pay the home buyer to buy it? Well, there are big advantages for both parties. For the home buyer, seller concessions can be a way to reduce the financial burden and can help pay for your closing costs. And there are tax advantages--you may be able to deduct discount points and real estate taxes* from your taxes. For the home seller, it can be a good way to sell your home faster, especially when you're trying to close on a new home yourself.
There are limitations to how much a seller is allowed to pay for and the amount can vary anywhere from two to nine percent of the purchase price or the home's appraised value. The specific amount depends on the kind of mortgage the buyer gets, how the property will be occupied, and how much the buyer borrows from the lender. You'll have to ask your mortgage banker to find out exactly how much your closing costs will be and how much the seller can contribute towards the closing.
Buying a home can be the most expensive purchase (or investment) you make. If you're buying a home, talk to the home seller and to your mortgage lender to find out whether seller concessions are possible. You may come out ahead!
*As always, please consult your tax advisor.
By Diane Tuman
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