Max Seller Concessions on a USDA Loan

Couple at settlementAre you a prospective homebuyer considering a USDA loan? If so, you're in for an exciting journey into rural homeownership. However, one aspect of this process that often gets overlooked is the potential for seller concessions.

Imagine negotiating with the seller to cover closing costs, prepaid items, and even repairs on your dream home! In this article, we will delve into the intriguing concept of maxing out seller concessions on a USDA loan, exploring how it can benefit you as a buyer and potentially give you an edge in today's competitive housing market.

Key Takeaway

  • USDA loan seller concessions are when the seller agrees to pay some or all of the buyer’s closing costs on a USDA loan. This can help the buyer save money upfront and buy a home with no down payment or PMI.
  • The USDA allows sellers to pay up to 6% of the sale price toward the buyer’s closing costs, regardless of the down payment amount. However, the seller cannot deliver more than the actual closing costs, and the buyer cannot receive any cashback from the seller.
  • The seller can pay any closing costs for the buyer if they are reasonable and customary for the area. These costs may include loan acquisition expenses, reasonable lender fees, and prepaid items.
  • To use USDA loan seller concessions to buy a home, you need to find a USDA-approved lender, a real estate agent, and a home that meets the USDA’s eligibility criteria. It would be best to negotiate with the seller about how much they will pay for your closing costs and what types of costs they will cover. You must also get a USDA appraisal, finalize the loan, and close the home.

What are Seller Concessions?

Seller concessions are negotiations or agreements where the seller agrees to pay a portion of the buyer’s closing costs. These costs may include expenses related to the mortgage, property taxes, home insurance, or other associated fees. By allowing the seller to cover these costs, the buyer can focus on the property's price rather than the extra expenses of purchasing a home.

Seller concessions can also help the buyer avoid paying the upfront guarantee fee, a one-time fee that the USDA charges for guaranteeing the loan. The upfront guarantee fee can range from 1% to 3.5% of the loan amount, depending on the loan type and the down payment amount. For example, if you borrow $200,000 with no down payment and use a USDA direct loan, your upfront guarantee fee would be $7,000.

The upfront guarantee fee can be paid at closing or rolled into the loan balance, but either way, it adds to the cost of the loan. However, if the seller pays you the guarantee fee, you can save money and lower your monthly payment.

What Are the Limits and Rules for USDA Loan Seller Concessions?

The USDA allows sellers to pay up to 6% of the sale price toward the buyer’s closing costs, regardless of the down payment amount. However, the seller cannot deliver more than the actual closing costs, and the buyer cannot receive any cashback from the seller.

For example, if you buy a home for $200,000 with a USDA loan and the seller agrees to pay $12,000 of your closing costs, but the actual closing costs are only $10,000, the seller can only pay $10,000, and the remaining $2,000 will be deducted from the sale price. The sale price will be reduced to $198,000, and the loan amount will be reduced to $194,000.

The seller can pay any closing costs for the buyer if they are reasonable and customary for the area. These costs may include the following items:

  • Loan Acquisition Expenses include legal, architectural, and engineering fees, title clearance, and insurance costs. The upfront guarantee fee and fees for appraisal, environmental inspections, surveying, tax monitoring, expenses for homeownership education counseling, and other technical services associated with obtaining the loan
  • Reasonable lender fees Reasonable lender fees, when financed, may include an origination fee and other fees. Lender fees must meet the points and fee limits published by the Consumer Financial Protection Bureau (CFPB) in the Federal Register at 12 CFR 1026.43(e)(3).

    They cannot exceed those charged by other applicants by the lender for similar transactions, such as FHA-insured or VA-guaranteed first mortgage loans. It is the lender’s responsibility to ensure CFPB requirements are met. Payment of finder’s fees or placement fees for the referral of an applicant to the lender may not be included in the loan amount.

    Discount points to “buy down” or permanently reduce the effective interest rate may be financed. Loan discount points and the loan origination fee must be itemized separately on the closing disclosure.
  • Prepaid Items. These include property taxes, home insurance premiums, interest, and escrow deposits. The seller can pay up to 12 months of property taxes, home insurance premiums for the buyer, and the interest that accrues from closing to the first payment date. The seller can also pay the escrow deposits that the lender requires to cover future property taxes and home insurance payments.

How to Use USDA Loan Seller Concessions to Buy a Home

If you want to use USDA loan seller concessions to buy a home, you need to follow these steps:

  • Find a USDA-approved lender and get pre-approved for a USDA loan. You can use our recommended lenders for home loans to compare rates and fees from different lenders.
  • Find a real estate agent and start looking for homes that meet the USDA’s eligibility criteria. You can use our home search tool to find homes for sale near you.
  • Make an offer on the home you want, and include a request for seller concessions in the purchase agreement. You can negotiate with the seller on how much they will pay for your closing costs and what type of costs they will cover. You can also ask the seller to pay the upfront guarantee fee if you want to save more money.
  • Get a USDA appraisal on the home to make sure it meets the USDA’s minimum property standards and is worth the agreed-upon price. The appraisal will also determine the maximum loan amount you can borrow based on the home value.
  • Finalize the loan with your lender and provide any required documents and information. The lender will verify your income, assets, credit, and employment and underwrite the loan according to the USDA’s guidelines.
  • Close the door and get the keys. The seller will pay the agreed-upon amount of your closing costs at the closing table, and you will pay the remaining amount (if any) with your funds or a gift from a relative or a friend. You will also sign the loan documents and the deed of trust and start making monthly payments.

Conclusion

In conclusion, buying a home with a USDA loan can be a good choice for many buyers, especially those in rural areas. Knowing the most seller concessions allowed on a USDA loan is essential for buyers and sellers to negotiate successfully. Buyers can make intelligent decisions and plan their budgets by understanding these limits.

Sellers can also benefit from knowing these concessions to ensure a smooth transaction. Both parties should work together to find terms that follow the USDA guidelines. With this in mind, potential homebuyers and sellers should seek professional help and explore their options when dealing with seller concessions on a USDA loan.

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