The mortgage loan process is notorious for using words and acronyms that are somewhat foreign to someone who has never purchased a home or worked in the lending business. It’s not uncommon to hear someone rattle off things little LTV (loan to value) or DPA (down payment assistance) and maybe even CLTV (combined loan to value). The list goes on and on but the point here is that the lending process almost has its own language. Depending on the loan type you may hear different things or a combination of things that seem new to you. One term that comes up in most all loan scenarios is Seller Concession.
Seller Concessions can easily be explained as the amount of closing costs the seller will pay for the buyer. The loan product and sometimes loan to value will determine the amount the seller can pay. The programs will allow a total not to exceed a certain percentage of the sales price. The lender however will want to see that amount converted to a dollar amount. So for example the conventional loan allows 3% seller concessions when the LTV is above 90% and will go to 6% when its 90% LTV or below. In this scenario if the sales price was $100,000 and the LTV was 95% then the max the seller could pay for the borrower in closing costs is $3,000. The government insured loans such as FHA, VA and USDA are much more aggressive. The USDA Loan for example allows 6% seller concessions. From the previous scenario the seller can pay up to $6,000 of the buyers closing costs on that same loan of $100,000. This is one of the many reason there has been a significant rise of government insured loans over the last 10 years. The government backed loans allow borrowers to get into homes with little to no money out of pocket.
The million dollar question is usually, “Why would a seller pay the closing costs in the first place?” The logic is pretty simple. Many borrowers today have minimal savings and if they are having to put money into the transaction for down payment it usually doesn’t leave much for the closing costs so without this feature there would be a lot less buyers for the sellers to sell their homes to. The theory is that the sellers price this into their negotiations so they are not really taking much if any a hit on the transaction. Seller concessions are a very important part of today’s home loan process.