What Happens When You Get Concessions on a Mortgage?
- When a seller offers concessions to the buyer, he's allowing the buyer to finance all or some of the closing costs, which are rolled into the loan and paid over time by the buyer. There are rules dictating how much a seller can subsidize this cost; FHA-sponsored loans allow seller concessions of up to 6 percent, while other loans are typically capped at 3 percent. Seller concessions are often referred to as "seller contribution."
- Many first-time buyers are surprised to discover that the cost of purchasing a home goes well beyond the purchase price. While fees vary based upon the size and price of the home, it's not uncommon for closing fees to total several thousand dollars. The title search and insurance policy, origination fees, prepaid interest, escrow, appraisal and inspection are just some of the "musts" that the buyer has to pay for. While some fees can be shopped and compared, some fees are fixed; regardless, they're all costly.
- At the closing, there is a rush of document signing and bill paying by all parties. When a buyer obtains seller concessions, the closing costs are rolled into the mortgage. As a result, the home must appraise at the higher loan amount. While it may seem like a good deal for the cash-strapped buyer, realize that these fees will now become greater due to the interest charges that the buyer will pay over the life of the loan. As a result, what would have been a $10,000 closing may wind up costing you $25,000 in payments after a typical 30-year fixed-rate loan.
- The term "seller concession" is often confused with the term "seller contribution." When the seller offers a contribution, she's offering to contribute toward the closing costs. This is a common tactic used by builders who are anxious to sell new construction, and the amount they're contributing is listed on the transaction's HUD-1 statement. It does not affect the mortgage loan or the appraisal; it's merely a contribution to the total cost made by the seller.