Wednesday, February 1, 2023

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What is a seller concession? – The truth about mortgages

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Now that the housing market is turning to homebuyers, the phrase “submissive seller” may become more common.

over the past decade Home sellers have an advantage. They often release their property higher than the normal price.

In many cases, homebuyers are forced into bidding wars. assuming they were lucky enough to get the chance

But now mortgage rates have doubled and home prices are falling. The situation is quite the opposite.

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If you are a future home buyer You need to know what a seller’s concession is and how it works.

What is a seller concession?

seller concession

Seller concessions are financial support from the home seller that reduces the closing costs of the home buyer.

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One of the biggest hurdles faced by prospective homebuyers is buying property. besides that FTI The constraints are having the necessary money (asset) to close home buying

Seller concessions ease that burden, making it easier. Qualify for a Home Loan and get property

Silver is typically generated through a slightly higher contract price. This reduces the buyer’s out-of-pocket expenses.

However, this means that the borrower will end up with a larger credit line. and financing those costs over time through higher monthly mortgage payments.

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For example, if a buyer offers $360,000 for a property with $10,000 in concessions to the seller, the seller might say, “Sure, all of this is yours for $370,000.”

You don’t really get free money. Because the purchase price is higher by the requested amount. Instead, it reduces the amount of cash due at closing.

In short, this means that you pay for that $10,000 through higher selling prices over time. instead of paying at account closure.

Please note that the property will need a higher valuation in order for the mortgage financing to go through.

And as a result, your down payment may change. Suppose you want to maintain the value of your loan (L TV) is the same ratio.

Although they weren’t popular when the housing market was heating up. But surrendering to the seller became more common as the buyer took advantage.

in new reality report According to Redfin, record home sales of 42% in the fourth quarter of 2022 included concessions to buyers.

What can a seller’s concession be used for?

The money received from the seller’s concession can be used to pay for various expenses. related to the purchase of a home

This may include lender fees. Third-party lending fees, taxes, insurance, HOA fees buy down paymentrepairs/improvements and much more.

Of course, if your investigation finds that repair is indeed necessary. These should reduce the selling price or be deducted from the seller’s earnings without increasing the selling price.

Lender fees
Loan origination fee
discount points
title insurance
Escrow fee
Appraisal
Attorney/recording fees
examination fee
property tax
transfer tax
homeowners insurance premiums
Mortgage insurance premiums
Funding Fee
top up list for Freeze account
interest cost
HOA fees
buy down mortgage

What can not use the seller’s concession?

in general Seller concessions cannot be applied to certain things, such as down payments. Buyers cannot get cash through seller donations.

For this reason, the concessions you receive must not exceed yours. Closing costsSo make sure you don’t ask for more than you need.

If you end up in surplus, you can explore paying. mortgage discount points to lower your mortgage rate or load a mortgage freeze account

In addition, concessions cannot be used to meet the borrower’s reserve or minimum contribution requirements.

and the Seller’s concession amount must be at/below the limit set by the relevant type of credit used for financing.

Vendor concession restrictions by credit type

Fannie Mae and Freddie Mac refer to the seller’s concession as

Fannie Mae considers the IPC to be both a financial concession. (more general) or sales concessions (less common)

For what they consider these sales concessions “are IPCs in the form of non-real estate items” such as cash, furniture, cars, moving expenses. along with financial concessions that exceed Fannie Mae’s limits.

The good news is credit lender It is not considered an IPC, although the mortgage lender is considered an interested party.

So you can get lender credit to reduce closing costs and home seller credit. (through concessions) to reduce your expenses

both Fannie and Freddy Returns most existing home loans, collectively known as corresponding credit.

for corresponding credits Seller concessions are limited to 2-9% of the selling price, as shown in the table below.

works of those who are interested

If the property is a primary residence or a second home The credit line will range from 3-9% based on your loan-to-value (LTV) ratio.

The more down payments, the more concessions you have. To calculate the seller’s concession Simply multiply the quoted selling price by the percentage allowed by LTV.

Please note that non-real estate and IPC items that exceed the limits will be treated as “Sales concessions” and will require the sale price of real estate to be reduced by the value of such sales concessions when calculating the LTV ratio for underwriting/rights purposes.

For investment properties, IPCs are limited to 2% regardless of LTV, so if the purchase price is $300,000, you’ll be limited to $6,000.

if it’s a HomePath PropertiesThe maximum IPC is 6% of the purchase price, although the LTV is above 90%.

Top seller concessions in FHA Loan is 6% of the lower of the selling price or appraised value of the property. regardless of LTV (Section 4155.1 2.A.4.A.)

Concession Top Seller in A USDA loan is also 6% although some say the loan amount and some say the selling price (source)

Either way Most borrowers who borrow money from the USDA do nothing. So it’s questionable.

Concession Top Seller in A Virginia loan accounted for 4% of the appraised price / selling price (source).

However, “Regular Discount Points and Buyer Closing Payments” do not need to be included in the limit. In other words, more than 4% is possible.

top seller concessions Jumbo Loan They are different because they are not subject to a single set of criteria like the loan types above. But there’s a good chance the limits are about the same.

Be sure the real estate agent loan officer (or mortgage broker) and sellers are well aware of these limitations.

Why is there a seller restriction in the first place? To ensure that house prices are not inflated. and to ensure that the borrower is qualified

Example of a seller’s concession

number of concessions $0 $10,000
discount $360,000 $370,000
20% down payment $72,000 $74,000
loan amount $288,000 $296,000
monthly payment $1,680.69 $1,727.38
payment difference +$46.69
Closing costs $15,000 $15,000
out-of-pocket expenses $15,000 (plus down payment) $5000 (plus down payment)

Let’s look at an example of how a concession seller works. Imagine that you found a home you like and bid $360,000 but need $10,000 in help closing it.

The seller said no problem. We can sell it for $370,000 and give you a $10,000 credit to cover your expenses.

you put down 20%So the down payment was increased by $2,000 to offset the slightly higher selling price.

The seller’s concession will not change the interest rate you are entitled to, which is 5.75% in both cases.

What changed besides the down payment was the loan amount, which increased from $288,000 to $296,000.

This resulted in an increase in monthly payments from $1,680.69 to $1,727.38, a difference of $46.69.

Sure, it’s nearly $50, but you might not even notice. Of course, you’ll notice $10,000 less off-the-shelf expenses at closing.

And that extra cash might come in handy when it comes to paying you. first mortgage paymentor decorate your new rental room

Vendor concessions compared to lower prices. (or price reduction)

Now you might be thinking Why not use a lower price instead of a concession? That way, you’ll need a lower down payment and you’ll have a lower mortgage.

The problem, as seen in the example above, is that a slight drop in selling prices hasn’t moved the needle.

The extra $50 a month is small for most homebuyers purchasing a nearly $400,000 property.

But getting $10,000 to cut down on the actual out-of-pocket expenses. That’s a big deal. After all, most Americans have very little savings.

So having to forgo $10,000 from other expenses. Related to buying a home can drain your bank account.

You choose to pay a slightly higher mortgage and keep your savings the same.

This is a similar argument to taking lender credit instead. pay mortgage pointsBecause there is more to keep in your pocket.

The only real downside of concessions In addition to higher payouts ie higher tax threshold on higher selling price, but again, it won’t be a significant difference.

Is the seller’s concession a good deal?

From a homebuyer’s point of view Seller concessions can reduce the financial burden at closing. but increase the purchase price

So it’s a case of paying less today. but more in the future through larger loan amounts Still, it can keep things more affordable and liquid.

Finally, you may need some extra cash on hand after buying a home to pay for your mortgage, moving costs, renovations, and more.

If possible, it’s better to request repair credit instead. In which case the purchase price will not increase. For this reason, a quality home inspection is so important.

It may also be possible to get the best of both worlds if you make a slightly lower offer and make concessions. This might be a better way to negotiate with the seller.

In the example above, you bid $350,000 with a $10,000 discount, bringing the original sale price to $360,000.

You’ll get help with $10,000 in closing costs without inflating the selling price.

Be strategic and make sure your real estate agent understands.

for home sellers Making concessions would be pointless if the purchase price was adjusted accordingly. especially in a down market

Basically, you’re expanding your pool of eligible buyers without you overspending.

Of course, it can slightly adjust the real estate agent’s commission based on the difference in sales price.

But if the seller’s concession takes you to the finish line They might just be worth it. Not only is it easier to find willing/able buyers. But also those who have an easier time qualifying for a mortgage.

Pros and cons of seller concessions

good

  • Reduce out-of-pocket costs if cash is scarce.
  • It may be easier to qualify for a home loan (assets).
  • You can maintain your liquidity after buying an expensive house.
  • It may only increase your monthly mortgage payment slightly.
  • Other purchases are allowed after closing such as furnishings, moving, etc.
  • able to attract more home buyers (If you are a home seller)

maybe not

  • tends to increase the selling price of assets (according to the amount lost)
  • Your monthly mortgage bill will be higher. (larger loan amount)
  • Closing costs are paid over time instead of prepayment. (Increased interest expenses)
  • Higher property taxes if the sale price is higher

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