The mortgage rules permit, but do NOT REQUIRE the seller to pay a percentage (or flat dollar amount) towards your closing, escrow and prepaid costs. The amount of the seller assistance is dictated by the type of mortgage.
The seller may pay up to 6% of the sales price to the buyers costs for an FHA mortgage. For a veteran mortgage (VA), the seller is allowed to pay all closing costs, and the prepaid and escrow costs up to 4% of the sales price. And for a conventional mortgage, it depends on the down payment. For 5% to 9% down, the seller can pay 3% of the sales price. Ten to 25% down, 6% is the limit. And here's a little known fact. If the down payment is 25% or greater, the seller assist can be as much as 9%.
Be careful . . . the seller is limited to the seller assist percentage or the actual
costs. Here's what I mean. Let's say the sales price is $100,000 and
you're financing the purchase with an FHA mortgage and you ask the
seller and the seller agrees to pay 6% of the sales price toward your
But, if all the allowable costs add up to only $5,000, then the seller will only be permitted to pay $5,000 and under this scenario, will keep the extra $1,000.
Can the Seller pay the down payment with a seller assist?
No! Just the closing costs, escrow and prepaid taxes and homeowners insurance.
Assume the home is listed at $106,000, but, you have the choice of purchasing the house with NO SELLER ASSIST at $100,000 or paying FULL PRICE at $106,000 and the seller will pay 6% toward your closing and escrow and prepaid costs. FHA mortgage, 30 year term.
|ASSUMPTION||No Assist||Seller Assist|
|Annual Real Estate Taxes||$3,200.00||$3,200.00|
|Annual Homeowners Insurance||$400.00||$424.00|
|Down Payment Percentage||Minimum||Minimum|
|Term||30 Years||30 Years|
|DETAILS OF THE TRANSACTION|
|Down Payment Amount||$3,500.00||$3,710.00|
|Escrow and Prepaids||$5,176.96||$5,295.58|
|Less Credit Report||$-||$-|
|Less Earnest Money Deposit||$-||$-|
|Less Seller Assist||$-||$6,360.00|
|Less FHA Financed Funding Fee||$965.00||$1,022.90|
|TOTAL CASH TO PURCHASE||$10,788.71||$4,789.43|
Notice that the cash requirement at closing is considerably less with a seller assist, but now for the bad news. Take a look at the mortgage payment . . .
|MONTHLY MORTGAGE PAYMENT||No Assist||Seller Assist|
|Principal and Interest||$523.21||$554.61|
|Real Estate Taxes||$33.33||$35.33|
As you can see, the mortgage payment is HIGHER with the seller assist than no seller assist. Why? Because with the higher sales price comes a higher mortgage amount, which in turn increases the principal and interest payment.
The real estate agent and or the lender may suggest that the seller increase the listed price to include the seller assist. In other words, raise the sales price beyond the listed price and build in the seller assist. This was a common practice prior to the mortgage melt down, and it's still done today, but, with tighter regulations, underwriters frown on this tactic. They can see through it and the appraiser may point this out to the underwriter in their appraisal report. Here's the potential consequence. The underwriter may only allow the "original" listed price and not the inflated price. So what happens, well, either the seller agrees to accept less or the deal falls apart. Here's your downside. You will probably have a home inspection prior to underwriting review, that's about $400, and you'll have an appraisal and credit report fee paid to the lender, figure about $400. So, if the mortgage falls apart because of the seller assist inflation, you will lose those out of pocket fees.
Offering a full price offer (not inflated) will usually be permitted, assuming the house appraises at the full, listed price.