Many home buyers are informed that the sellers are offering an “X” amount of dollars towards the closing costs as an incentive for a buyer (s) to purchase their home.

My past experience working with a lender and working as a Paralegal has taught me that some of these buyers may end up with a sad surprise on the day of closing. The amount of the closing costs is less than what they thought it would be.

Here are some tips to educate you in buying a home with seller concessions:

SELLER CONCESSIONS DEPEND ON EACH LENDER’S POLICIES:

1) Seller concessions depend on your type of loan – check with your lender to know what is the maximum amount of seller’s concessions you are allowed to have with your specific type of loan:

Example:

If “John and Mary Buyers” type of loan allows only 3% or less seller concessions (I have seen up to 6% allowance, check with your lender for your specific type of loan), and they decide to purchase a $200,000 home, the lender would allow them only $6,000 or less seller concessions in this case. If the seller offered $10,000 as a seller concession, perhaps “John and Mary” want to look into other type of loans or other lenders, so that they do not lose $4,000 in seller concessions.

Make sure your lender is clear if the allowable amount of seller concessions is (in this example) 3% of the loan or 3% of the purchase price for your type of loan. Following the same example, if John and Mary are purchasing the home for $220,000, and the lender allows a seller concession of 3% based on the purchase price, then they are allowed $6,600 seller concession.

2) Check on the contract wording – Is it “X” amount for “closing costs” or for “closing costs and prepaids”?

Again, if John and Mary’s closing costs are (for example) $7,000 and the seller concession is $10,000, most likely they will not be allowed the $3,000 difference if it is just for “closing costs”.

Prepaids may include the appraisal, your first down payment of home owner’s insurance, an inspection, etc. These charges are not included in the amount you have to bring to closing, because you (most likely) already paid for them in advance.

Following the same example, if John and Mary’s prepaids add up to $1,000 plus their above closing costs total of $7,000, that equals $8,000 maximum seller concession allowed if the contract indicated “for closing costs and prepaids”. If the seller offered $10,000 seller concessions, then John and Mary lost $2,000 at closing on seller concessions!

3) Some type of loans do not allow for the buyer to get any cash back at closing, or these loans only allow a limited amount of cash back at closing. Sometimes they only allow you to have as cash back the things you prepaid before the closing. If John and Mary only prepaid (for example) $400 for the appraisal, they may be entitled, if applicable, to $400 cash back. This is another way buyers lose seller concessions at the table, because they did not know they have a limited or no cash back type of loan.

4) Can the rest of the seller concessions be paid towards your principal balance so that you do not lose any seller concessions?

This is called a “principal curtailment”. Most likely the lender will not allow it since they lose money if they do, but you can check with your lender on their policies.

5) What can you do not to lose seller concessions?

You can ask your loan processor what options you have. Loan processors know the lender policies or they can check with the loan underwriter for you.

A loan processor may be able to adjust the loan amount within certain guidelines.

The best thing buyers can do is:

DO NOT WAIT UNTIL CLOSING DAY TO CHECK ON THIS. CHECK FROM DAY ONE WITH YOUR LENDER AND YOUR ATTORNEY. SHOP AROUND! BE INFORMED!