Are you looking for a home and looking to save on closing costs where you can? If you qualify, VA loans are a wonderful benefit for our nationâs eligible servicemembers, veterans and qualifying surviving spouses. Among the major plusses are the competitive rates and that itâs one of the few mortgage options that allows you to generally buy a home with no down payment.
One thing you might not be aware of is that the VA loan seller concessions policy is also somewhat more flexible than whatâs available for other loan options. Weâll go over what you need to know to take advantage of this, but letâs start at the beginning.
Buying a home can be an exciting yet stressful process. As a veteran using your VA home loan benefit, you want to take full advantage of what it offers to make the homebuying journey smoother. One key area to understand is seller concessions – what they are, how they work, and what limits apply. With the right knowledge, you can properly utilize seller concessions as part of your VA loan.
What Are Seller Concessions?
A seller concession is when the home seller agrees to cover certain closing costs or other fees that are normally paid by the buyer Some common seller concessions include
- Paying for the buyer’s closing costs
- Paying discount points to lower the interest rate
- Paying for repairs or improvements needed on the home
- Providing a cash credit to the buyer at closing
- Paying the VA funding fee on behalf of the buyer
Essentially the seller is giving the buyer something of value to help facilitate the home purchase. Seller concessions make the transaction more appealing to buyers and can give sellers a competitive edge in the market.
Why Do Sellers Offer Concessions?
There are a few key reasons why a seller might agree to concessions:
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Attract buyers – In a competitive housing market, sellers use concessions to make their home more enticing to buyers. It helps set their listing apart.
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Negotiation strategy – During negotiations, a seller may agree to cover certain closing costs or fees rather than reducing the sale price. This allows them to keep the sale price higher.
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Sell faster – By offering concessions, sellers can promote their listing as a good value and potentially sell it faster. Speed of sale is important in many situations.
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Offset needed repairs – If there are repairs or improvements needed, the seller can offer a credit at closing to offset the cost instead of doing the work themselves.
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Clear excess inventory – Builders with excess new construction inventory will sometimes offer major concessions to attract buyers and reduce their inventory.
No matter the reason, seller concessions ultimately benefit the buyer on a VA loan by reducing their out-of-pocket costs. But it’s important to understand the limits.
VA Home Loan Limits on Seller Concessions
The VA places limits on how much in concessions a seller can provide. Here are the key guidelines:
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4% limit – The total seller concessions cannot exceed 4% of the property’s fair market value as determined by the VA appraisal. This includes closing costs, repairs credits, and any other concessions.
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6% limit for closing costs – Closing costs paid by the seller are capped at 6% of the home’s sale price regardless of the appraised value.
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Cannot use concessions for downpayment – The buyer must still make the required downpayment from their own funds. Seller concessions cannot be used toward downpayment.
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No concessions on VA loans over $453,100 – For any VA loan exceeding the current loan limit cap of $453,100, seller concessions are prohibited entirely except when required by local law.
It’s fine to negotiate seller concessions up to these limits. But any concessions that exceed VA guidelines make the loan ineligible for VA financing.
Common Types of Seller Concessions
While sellers can get creative, below are some of the most common concessions for VA loans:
Closing Costs – The seller pays all or a portion of the buyer’s closing costs, including origination fees, appraisal, credit report, etc. This is the most popular concession.
Interest Rate Buydowns – The seller provides funds at closing to temporarily buy down the interest rate for 1-2 years. This lowers monthly payments initially.
Repairs and Improvements – Instead of making repairs themselves, the seller credits the buyer at closing to make needed updates.
Home Warranty – The seller purchases a 1-year home warranty plan as an added incentive for the buyer. This covers repairs after closing.
Moves Costs – In some cases, the seller may offer a credit to cover part of the buyer’s moving expenses.
Can a Seller Pay the VA Funding Fee?
One common question is whether the seller can pay the VA funding fee on behalf of the buyer as a concession. The answer is yes – paying the funding fee is allowed within the 4% concession limit.
As an example: if the home is appraised at $350,000, the seller could provide up to $14,000 in total concessions ($350,000 x 4%). This could be used to pay the approx. $8,750 VA funding fee and additional closing costs.
How Are Seller Concessions Reflected on my Closing Disclosure?
At closing, any seller concessions will be itemized on Section L of your Closing Disclosure under “Paid Already by Seller.” This allows you to clearly see the amount of concessions provided.
For instance, you may see a $5,000 closing cost credit paid by the seller, or a $2,000 credit for new appliances. Having all concessions documented provides transparency.
Can a Seller Increase the Concession at Closing?
In most cases, no. The seller concession cannot exceed the amount agreed upon in the original purchase agreement without prior approval from the VA lender. Any increases to the concession at closing could cause issues with VA guidelines.
Key Takeaways on VA Loan Seller Concessions
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Seller concessions provide an excellent way to reduce your cash needed to close while staying within your VA loan benefits.
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Be sure you understand VA limits on the maximum concessions allowed, and that any concessions are documented on your purchase contract.
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Work with your VA-approved lender and real estate agent to negotiate fair seller concessions that align with your needs and VA requirements.
Using your VA home loan is a great opportunity to get into a home with less cash out-of-pocket. With proper use of seller concessions, you can make your purchase even more affordable.
What Are The Specifics Of The VA Seller Concession Rules?
In general, any category considered a closing cost not paid by a buyer or otherwise dealt with using a lender credit is an eligible seller concession. This means the seller can pay for any of the following:
- Stamps
- Attorney fees
- Title insurance
- Real estate tax service fees
- Prepaid property taxes and homeowners insurance premiums
The categories allowed donât really differ from any other mortgage. The difference comes in how the limits are handled.
What are the pros and cons of asking for seller concessions?
Asking for seller concessions has the benefit that if they agree to it, your closing costs could be lower. On the other hand, as we mentioned earlier, the fact that there are very few houses on the market relative to the level demanded in many areas across the country gives sellers a distinct advantage. They can be picky. They might pass over your offer.
One way you might be able to get them to agree to seller concessions is to pay a higher price for the home, assuming the appraisal comes in high enough. In this way, they pay the costs upfront and you pay for your closing costs over the term of your loan.
VA Loan Secrets: Using Seller Concessions (advanced strategies)
What are seller concessions on a VA loan?
According to VA loan rules, the seller can contribute up to 4% of the purchase price in seller concessions. These concessions on VA loans may include payments toward a buyer’s judgments and debts, as well as VA funding fees.
How much can a VA homebuyer ask for a seller concession?
For example, if the sale price of the home is $300,000, the maximum amount in seller concessions a buyer could ask for is $12,000. Seller concessions can be an excellent benefit for VA loan borrowers. VA homebuyers can buy their properties for less and reduce their overall spending.
What are seller concessions on an FHA loan?
On an FHA loan, seller concessions can be put towards closing costs, appraisal fees and other expenses related to this real estate purchase. For U.S. Department of Agriculture (USDA) loans, the seller can contribute up to 6% of the buyer’s loan amount. This is the one loan type where seller concessions are not based on the home price or appraised value.
What if a VA loan concession is too much?
This can occur after the initial home inspection or during the final homebuying negotiations. When applying for a VA loan, it’s important to keep in mind that any concession or combination of concessions totaling more than four percent of the loan amount is considered excessive by the VA and will not be approved.