Since 1944, the Department of Veterans Affairs has been making home loans available to those who have served our country. The VA loan has a number of advantages, including some of the lowest available rates and the ability to purchase or refinance with no down payment.
Current VA loan seller policies around concessions could also make the program even more attractive to eligible active duty service members, veterans and their surviving spouses.
Before we go any further, let’s stop the record for a second and go over what a seller concession is.
Seller Concessions Basics
Buyers are always looking to keep the price down and sellers obviously want as much money as they can get from their house. You can negotiate on the actual price, but seller concessions allow the two parties to negotiate other aspects.
Concessions allow for sellers to pay for things like prepaid interest points so buyers can get into the house with a lower rate; the appraisal, origination fees, title insurance and so on are also common concessions.
There are some things that sellers aren’t allowed to help with, including the down payment. They also can’t include furniture in the seller concessions. In order to help in these areas, sellers have to lower the asking price.
The maximum amount of the contribution is based on a percentage of the appraised value or sales price (whichever is lower).
Allowable Seller Concessions On A VA Loan
The items that the VA considers to be contributable seller concessions include:
- VA funding fee payments: Although there’s not a required down payment on VA loans, there’s a funding fee that helps support the loan program.
- Escrow: The seller is limited in the amount they can pay toward a buyer’s property taxes and insurance prepayments.
- Large gifts: This could include items such as appliances, televisions, etc.
- Credit balance payoffs or judgments on behalf of the buyer
The 4% Rule
The VA does allow for seller concessions on VA loans, but their rules state that the seller can only contribute up to 4% of the purchase price or appraised value of the property. For example, if a home is appraised at $200,000 value, the concessions cannot exceed $8,000 ($200,000 x 4%).
In some markets sellers can use concessions as a way to get buyers to make more competitive offers. This can cause some borrowers to request higher VA loan limits than they can actually afford to take out. Because of this, the VA has set a 4% ceiling.
Seller concessions are just one way to keep closing costs at bay. If you can’t renegotiate the sales price to limit the amount you bring to the table, you could take advantage of lender credits by taking a slightly higher interest rate.
What Is The Maximum Seller Concession For A VA Loan?
Beyond the 4% of allowable seller concessions, there are no caps for contributions towards certain closing-related expenses. This means that sellers can contribute as much as they want toward closing costs in the following categories:
- Discount points: Discount points are prepaid interest. Prepaying a certain amount of interest allows you to buy down your interest rate. Sellers can pay discount points that align with market rates for an agreed upon interest rates. Any points paid above market rates will be considered closing costs.
- Origination costs: These are the costs associated with the lender actually setting the loan up.
- Miscellaneous fees: Sellers can help pay for a property survey, appraisal, credit report and other things associated with getting the loan.
The Bottom Line: Seller Concessions Can Help Veterans Become Homeowners
In addition to the no down payment requirement that VA loans provide, seller concessions can also be beneficial in helping veterans become homeowners. This is because seller contributions can reduce some of the other cost barriers (such as closing costs or funding fees) that can make buying a home difficult. If desired, veterans can also use these contributions to pay off their other debts.
To see if you are eligible to qualify for a VA loan, get started on the preapproval process today.
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