Most buyers are know the term “down payment” and are aware they will need some savings in order to purchase a home. But there are other upfront cost associated with buying a home. These costs include: title insurance, lender fees, escrow accounts for taxes, transfer taxes and settlement fees. Added up they can cost up to 6% of the purchase price of the home. “Seller assist” is a feature of mortgage loans that is used to help the buyers to mortgage a portion of these closing costs. Each lender has its own specific guidelines as to how much assistance the seller can provide. Typically, the amount allowed depends on the type of mortgage, down payment and sales contract.
The seller may pay up to 6% of the sales price to the buyers costs for an FHA mortgage. For a veteran mortgage (VA), the seller is allowed to pay all closing costs, and the prepaid and escrow costs up to 4% of the sales price. And for a conventional mortgage, it depends on the down payment. For 5% to 9% down, the seller can pay 3% of the sales price. Ten to 25% down, 6% is the limit. If the down payment is 25% or greater, the seller assist can be as much as 9%.
However- the seller is limited to the seller assist percentage or the actual costs. For example: the sale price is $100,000 and you are financing the purchase with an FHA mortgage. You ask the seller to pay 6% of the sales price toward your costs and the seller agrees. .
NOTE: if all the allowable costs add up to only $5,000, then the seller will only be permitted to pay $5,000.
Is it better to have a lower sales price and no seller assistance or a higher sales price with a seller assist?
Assume the home is listed at $106,000, but, you have the choice of purchasing the house with NO SELLER ASSIST at $100,000 or paying FULL PRICE at $106,000 and the seller will pay 6% toward your closing and escrow and prepaid costs. FHA mortgage, 30 year term.
The cash requirement at closing is considerably less with a seller assist, but now for the bad news. The mortgage payment is HIGHER with the seller assist than no seller assist. Why? Because with the higher sales price comes with a higher mortgage amount, which in turn increases the principal and interest payment.
Make Sense? Here are some common questions.
Q. Can the seller assist be used for the down payment?
A. No. The seller assistance is limited to closing costs and prepaid expenses (i.e. tax escrow, prepaid homeowners insurance and per diem interest, etc.)
Q. Can the seller assist exceed closing costs?
A. The mortgage rules clearly state that the seller assistance cannot exceed the allowable closing and prepaid costs. In short, no cash back.
Q. How does the seller assist affect the seller?
A. The seller assist may be necessary to help the buyer purchase the home. In many situations, home sellers will concede a seller assistance in lieu of a reduced sales price.
Consult with your Real Estate agent to see if this is right for you!