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What Does Seller Assist Mean?

Emoticon-help-wanted-signThe 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 (seller paid closing costs) is dictated by the type of mortgage, down payment and sales contract.

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 costs.

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.

Is it better to have a lower sales price and no seller assistance or a higher sales price with a seller assist?

Let's compare:

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.

ASSUMPTIONNo AssistSeller Assist
SALES PRICE$100,000.00 $106,000.00
Annual Real Estate Taxes$3,200.00 $3,200.00
Annual Homeowners Insurance$400.00 $424.00
Down Payment PercentageMinimumMinimum
Mortgage Amount$97,465.00 $103,313.00
Interest Rate5.00%5.00%
Term30 Years30 Years
Down Payment Amount$3,500.00 $3,710.00
Closing Costs$3,076.75 $3,166.75
Escrow and Prepaids$5,176.96 $5,295.58
Subtotal$11,753.71 $12,172.33
Less Appraisal$-$-
Less Credit Report$-$-
Less Earnest Money Deposit$-$-
Less Seller Assist$-$6,360.00
Less FHA Financed Funding Fee$965.00 $1,022.90
TOTAL CASH TO PURCHASE$10,788.71 $4,789.43
Principal and Interest$523.21 $554.61
Homeowners Insurance$266.67 $266.67
Real Estate Taxes$33.33 $35.33
MIP/PMI$72.38 $76.72
MONTHLY PAYMENT$895.59 $933.32

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 . . .

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 with a higher mortgage amount, which in turn increases the principal and interest payment.

Final comment
Emoticon pointing to the rightThe 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.

Rotating question mark  Frequently Asked Questions About Seller Assistance (seller assist)

Q. Can the seller assist be used for the down payment?
A. No. The seller assistance is limited to closing costs and prepaid expenses (i.e. tax escrow, prepaid homeowners insurance and per diem interest, etc.). The FHA and Conventional97, and HomeReady loans permit the down payment to be "gifted".

Q. Can the seller assist exceed closing costs?
A. The mortgage rules clearly state that the seller assistance can not exceed the allowable closing and prepaid costs. In short, no cash back.

Q. How do I get my money back after closing for repairs?
A. If the home requires repairs, use a seller assist to reduce the total cash requirement and use the savings toward repairs. If the home requires more money to make repairs or upgrades, I suggest you look at the 203(k) loan.

Q. How does the seller assist affect the seller?
A. The seller assist may be necessary to help the buyer purchase the home. In many situations, home sellers will concede a seller assistance in lieu of a reduced sales price.

Q. How does the seller's assist work?
A. The amount/cost of the seller assist is defined by the sales contract. The amount of the seller paid closing cost cannot be outside of settlement.

Q. Is a seller assist a good idea?
A. Every home buyer is different. If you're scratching up cash to buy a house, then yes, a seller assist is a good way to reduce the amount of cash at closing. Seller assist can be used to purchase discount points to lower the interest rate.

Q. Is a seller assist tax deductible?
A. The seller assist is not tax deductible. The cost is an ordinary expense on the sale.

Q. What happens if the closing costs are less than seller agreed to pay?
A. As stated earlier, the maximum seller assistance is limited to the amount stated in the sales contract. If the closing costs are less than anticipated, the seller gets to keep the difference.