Maximize Your USDA Home Loan Benefits with Seller Concessions

Buying a home is an exciting milestone in life, but it can also be costly upfront. Fortunately, USDA home loans allow seller concessions to help cover your closing costs and make homebuying more affordable. Seller concessions are credits the home seller provides to the buyer, usually for closing costs. With USDA loans, you can receive up to 6% of the purchase price in seller concessions.

What Are Seller Concessions?

Seller concessions are sums of money the home seller agrees to pay toward the buyer’s closing costs and prepaid items. For example, the seller concessions can go toward:

• Origination fees
• Appraisal fees
• Credit report fees
• Home inspection fees
• Tax monitoring service fees
• Discount points
• Prepaid interest
• Homeowner’s insurance premiums
• Property taxes
• Title insurance fees
• Recording fees
• Transfer taxes

Essentially, the seller concessions lower your cash requirement at closing. Instead of you having to pay these costs out of pocket, the seller foots part or all of the bill through a credit

Seller concessions are extremely common with USDA loans. In competitive markets where home prices are rising, sellers often agree to concessions to entice buyers and smooth the transaction.

USDA Loan Seller Concession Limits

USDA home loans place a cap on how much sellers can credit buyers The maximum is 6% of the sales price

For example, if you purchase a $200,000 home with a USDA loan, the most the seller can credit you is $12,000 (6% of $200,000).

The 6% limit applies to all interested party contributions combined. In addition to the seller, an “interested party” can include the real estate agent, home builder, mortgage lender, or other parties with an interest in the transaction.

As long as the total contributions don’t exceed 6% of the sales price, you can receive concessions from multiple interested parties.

Benefits of Seller Concessions

Seller concessions provide two major benefits on USDA home loans:

1. Lower your cash to close

The primary benefit of seller concessions is reducing your upfront cash requirement. Closing costs like origination fees, appraisal fees, and prepaid taxes can total 3-5% of the loan amount.

For a $200,000 purchase, you could pay $6,000-$10,000 in closing costs. But if the seller credits you the maximum 6% concession, or $12,000, you may have little or nothing due at closing.

Lowering your cash to close is extremely helpful when budgets are tight. The less cash you need upfront, the easier it is to buy the home.

2. Pay a higher purchase price

Seller concessions allow you to stretch your USDA loan amount to afford a more expensive house.

USDA loans limit the loan amount to 100% of the appraised value. But seller concessions let you exceed that limit.

For example, say you qualify for a $200,000 loan based on your income and debts. The house appraises for $200,000, so ordinarily $200,000 would be your maximum purchase price.

But if the seller credits you 6% or $12,000 in closing costs, you can pay $212,000 for the house ($200,000 loan amount + $12,000 seller credit).

Without the concessions bumping up your purchasing power, you may have been priced out of that home.

How Seller Concessions Affect Loan-to-Value

When the seller credits you for closing costs, it increases your loan-to-value (LTV) ratio.

LTV compares the loan amount to the home’s appraised value. Generally, higher LTVs signify greater risk for the lender.

For instance, say you purchase a $200,000 home. The appraised value is also $200,000. If you borrow $200,000, your LTV would be 100%:

Loan amount: $200,000Appraised value: $200,000 $200,000 / $200,000 = 100% LTV

But if the seller gives you a $12,000 concession, and you still borrow $200,000, your LTV would be 106%:

Loan amount: $200,000Appraised value: $200,000Seller credit: $12,000($200,000 + $12,000) / $200,000 = 106% LTV

The concessions inflate the LTV because you’re able to borrow above the appraised amount. Fortunately, this isn’t an issue with USDA loans. USDA allows LTVs up to 106% when part of the increase is from seller credits.

How to Get Seller Concessions

As the buyer, you don’t have direct control over the seller concession amount – that’s ultimately the seller’s decision. But there are a few things you can do to request and obtain concessions:

• Make the request early: Ideally, ask for concessions as soon as you submit your purchase offer. It gives the seller time to factor the credits into the negotiation. Don’t wait until right before closing to bring it up.

• Document the request: Specify the concessions and amount in your purchase offer. Don’t just make a blanket request. Put the agreed amount in writing to prevent misunderstandings.

• Mention common uses: Give the seller examples of how you’ll use the credits, like origination fees, prepaid taxes, etc. It shows them the money will go toward closing costs.

• Sell it as a win-win: Note how the concessions benefit both parties. Explain how credits can help get the deal done by reducing your upfront costs.

• Be flexible on price: If needed, consider coming up slightly on your offer price in return for getting concessions.

• Get your agent’s advice: Lean on your real estate agent’s expertise in negotiating concessions with sellers. They can guide you on reasonable requests.

With some savvy negotiating and persistence, you can often get at least part of the maximum 6% concession limit from the seller.

Lender Incentives and Premium Pricing

In addition to seller credits, some lenders provide incentives or “premium pricing” deals on USDA loans.

Here’s how it works:

The lender offers a higher interest rate than their typical rate, say 50 basis points higher. In exchange, the lender gives you a lender credit to cover most or all of your closing costs.

For instance, on a $200,000 loan amount, a 0.5% higher rate equates to about $18,000 in additional interest paid over 30 years. The lender then turns around and applies that $18,000 as a credit toward your upfront closing costs.

This “premium priced” deal accomplishes two things:

1. The lender credit reduces your cash to close, similar to a seller concession.

2. The lender earns more interest income over the long run from the higher rate.

One difference with lender credits versus seller concessions is they don’t count toward the 6% limit. You can get 6% seller concessions, plus additional lender credits through premium pricing.

How to Use Seller Concessions

To maximize your USDA loan benefits, use seller credits for closing costs you must pay upfront. Typical examples include:

• Origination fees
• Appraisal fees
• Credit reports
• Home inspections
• Earnest money deposit
• Lender-paid mortgage insurance premium
• Prepaid homeowners insurance premium
• Prepaid property taxes
• Title insurance fees
• Recording fees
• Transfer taxes

Avoid applying concessions toward ongoing monthly costs like principal, interest, or mortgage insurance. You’ll just owe those costs out of pocket after closing. Instead, allocate credits toward one-time, upfront expenses to minimize your cash requirement.

Also, make sure the seller concessions don’t exceed actual closing costs. Leftover credits must go toward lowering your loan principal. The lender can’t return excess concessions to you in cash.

Are There Closing Cost Limits?

USDA loans don’t limit total closing costs like FHA or VA loans. As long as the costs are “reasonable and customary” for your market, you can finance unlimited closing costs into the loan.

That said, be cautious about excessive fees. Costs that exceed norms for your area may be deemed unreasonable and rejected by the underwriter. Discuss prevailing costs with your lender so they can guide you appropriately.

Review Concessions with Your Lender

Work closely with your lender when receiving seller credits on a USDA loan. Here are some key points to discuss:

• What closing costs are you paying? Review all your upfront costs and get guidance on optimal uses for the credits.

• What are reasonable fees? Verify with the lender that your closing costs align with norms for the market.

• How will concessions affect your loan amount? Understand if/how the credits will increase your loan amount and LTV.