Why do lenders limit the amount of seller concessions to 3%? As a buyer, if the seller agrees to 3.5%, what difference does it make to the lender?

Asked by Cows3500, 22202 Tue Oct 25, 2011

We offered $299,900 (the listing price) with 3.5% closing cost credit. I am being told that the lenders won't allow more than 3% - why? If the amount they are lending doesn't change based on the credit, what would it matter?

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15
Dejajanee, Home Buyer, Fremont, CA
Wed Jun 15, 2016
There is no underwriting guideline limit on Seller Concessions on USDA Loans, but Seller Concessions are capped at the actual amounts for the Buyer's closing costs, pre-paid items and impounds collected on the purchase transaction. In addition, if the appraised value is higher than the purchase price, the borrower's closing costs can be financed into the loan amount.
Web Reference: http://USDALenders.org
2 votes
Gregorio Den…, , San Diego, CA
Tue Oct 25, 2011
It depends on what type of financing you are using as well as the down payment. FHA allows up to 6% while Fannie Mae has a sliding scale.

Greater than 90%LTV = 3% max
75.01% to 90% LTV = 6% max
75% or less = 9% max

Always get mortgage advice from a licensed mortgage loan officer. Whomever is giving you this information is either misinformed or does not understand.

Refer to Fannie Mae Selling Guide page 374-376:
https://www.efanniemae.com/sf/guides/ssg/sg/pdf/sel092711.pdf
Web Reference:  http://WeFixRates.Com
2 votes
Shane Milne, Mortgage Broker Or Lender, South Jordan, UT
Tue Oct 25, 2011
I think Cows may be wondering why is the limit 2/3/6/9%, etc... and not 3.5%. Not "why is my lender saying I can't get the extra .5% credit".

That would probably only be known by the government sponsored entities of Fannie Mae & Freddie Mac who seem to set the basis for guidelines for the mortgage industry as a whole. The reason being is that borrowers who tend to put less "skin" in the game (i.e. money into the transaction) have a higher default rate than those who put more, studies have shown. So when they determine what loan programs they feel comfortable making, after they've discussed it with their insurance companies, consulted piles of data, perhaps they determined that if the borrower isn't putting at least 10% down from their own funds, then it would be too risky to allow them to get help with their closing costs in excess of 3% of the sales price.

I could only speculate.
1 vote
Cows3500, Home Buyer, 22202
Tue Oct 25, 2011
Thank you Shane - that was exactly what I was asking.
0 votes
Rob Weber, Mortgage Broker Or Lender, Plainfield, IL
Tue Oct 25, 2011
Lew, that was refreshing follow-up to what I said, to see from a Realtor, nice job. Many agents as I know you already know don't take the time to understand this component of a purchase.
0 votes
Lew Corcoran, Agent, Easton, MA
Tue Oct 25, 2011
A lot will depend on the type of mortgage you are applying for.

For example, if you are applying for an FHA mortgage, the loan must conform to FHA requirements. FHA allows sellers to contribute up to 6% of the purchase price towards settlement costs.

For USDA Rural Development loans, the mortgage must adhere to USDA requirements. For USDA loans, there is no maximum limit to seller contributions. However, anything over 6% must be explained in writing.

For VA loans, the loan must adhere to VA requirements. The maximum seller contribution towards closing costs on a VA loan is 4% of the purchase price. Sellers can contribute up to another 2% of the purchase price to be used towards points to lower the buyer's mortgage interest rate.

If you are applying for a conventional mortgage, it must conform to Fannie Mae / Freddie Mac underwriting requirements. Fannie Mae / Freddie Mac allow a maximum 3% seller assist if you are putting less than 10% down. If you are putting between 10% and 25% down, the sellers can contribute up to 6% towards settlements costs. If you put more than 25% down, the sellers can contribute up to 9%.

All that being said, lenders can impose tighter restrictions (you sometimes here the term "lender overlays.").

Your mortgage loan originator should be able to explain these seller contribution limits to you.
Web Reference:  http://LewCorcoran.com
0 votes
Rob Weber, Mortgage Broker Or Lender, Plainfield, IL
Tue Oct 25, 2011
I understood your question previously and answered below.

To expand on what I said earlier the INVESTOR (Fannie Mae, Freddie Mac, Ginnie Mae) who ultimately funds these loans and makes the mortgage machine run set the guidelines. Freddie and Fannie say that based on your % of down payment, your MAXIMUM seller contributions are "y". In this case, that figure is 3%. The "lender" is the one who originates and closes your loan who ultimately packages and sells your loan to one of these three major investors (typically) but retains the servicing rights (you make your payment to the servicer typically, not the actual investor). The lender can't tell you 3.5% in concessions will be allowed if the investor who's buying the loan they're underwriting will not buy it. If Investors don't buy loans, the lenders have to use their own capital which affects their bottom line and ultimately would mean much higher rates as they would eventually run out of money to loan.

In short, the majority of guidelines are investor driven. Lenders will sometime add additional criteria but often the bulk of what they'll allow is passed on to the consumer (borrower).

I hope this clears things up.
Web Reference:  http://RobWeber.com
0 votes
Cows3500, Home Buyer, 22202
Tue Oct 25, 2011
I am not making myself clear. I get that there are guidelines for certain lenders that limit it to 3%. What I am trying to understand is why those guidelines exist. Here is my example: I bring my entire $15,000 down payment to the closing. Plus, I bring whatever closing costs are not covered by the 3.5% credit. If the closing costs are less than 3.5% of the purchase price, then the left over is gone, I get that. What I am trying to understand is why the amount of the credit is of importance to the lender. Why will they allow 3% and not 3.5? Whether I write a check to pay all of the closing costs, or the seller does (not counting my down payment) seems immaterial - it has no effect on the dollar amount being financed. Is my question clearer now?
0 votes
Rob Weber, Mortgage Broker Or Lender, Plainfield, IL
Tue Oct 25, 2011
Scott, if you read down the buyer follows up with the program and product type and my answer covered that. I too sometimes get too wrapped up in helping consumers to read the other responses. :)
0 votes
Scott Godzyk, Agent, Manchester, NH
Tue Oct 25, 2011
It really depends on the type of loan, if the guidelines are a maximum of 3% back unfortanately you either have to find a different type of loan that allows more or accept it. You should have been told this before you made an offer. The first step is to get prequailified and know what the guidelines of your loan are. You need to speak with your loan officer beciuase their answer is the only one that counts. if you ar enot haoppy, consulty another mortgage company or bank.
Web Reference:  http://www.ScottSellsNH.com
0 votes
Rob Weber, Mortgage Broker Or Lender, Plainfield, IL
Tue Oct 25, 2011
Seller contributions can _NEVER_ be used to reduce your down payment. You're still looking at bringing the 15.5k to closing with adjustments for tax prorations and escrow funding. The actual cash you bring to closing (minus your earnest money) may actually be less than your total 5% down payment depending where you are in the country and the tax proration % you're receiving (typically it'll be 100% from Fannie Mae properties).

I think this is what you're referring to with regards to your 3.5% contribution:
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HomePath® Buyer Incentive: June 14 – October 31
Fannie Mae is currently offering buyers up to 3.5% in closing cost assistance through October 31, 2011. A $1,200 selling agent bonus is also available to selling agents who close on an owner occupant property and meet all eligibility requirements and terms and conditions.
----------

Further down in the FirstLook guidelines for Homepath, here's hwat they say about the 3.5% contribution:

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Buyers with total closing costs under 3.5% are not eligible to receive the difference as a credit.
--------
Buyers should consult their lenders for guidance on financing. Lenders and mortgage products may impose their own limitations on the use of the 3.5% incentive. For example, the lender may consider the incentive a Seller Contribution and limit the amount to 3.0%. In those instances, the remaining 0.5% will no longer be available to the buyer.
------

I don't know any lender that doesn't consider this 3.5% a seller contribution and thus is subject to the 3% cap, my current company included.
Web Reference:  http://RobWeber.com
0 votes
Cows3500, Home Buyer, 22202
Tue Oct 25, 2011
Since I can't edit my question, I will post an "answer" to better clarify my question. Listed price was $299,900, we offered $299,900. 5% down payment. According to the estimated worksheet my "lender" did, my loan amount will be $284,905.00 . It is a Homepath property, no appraisal is necessary. Doesn't the closing cost credit, or sellers concession or whatever you want to call it just limit the amount of money I bring to the closing table? Why would it matter? Am I completely confused?
0 votes
Rob Weber, Mortgage Broker Or Lender, Plainfield, IL
Tue Oct 25, 2011
Gregorio said exactly what I was about to.

In addition to his statement and Tom's, concessions above what the lender (actually what the investor will allow, lenders just implement the investor's guidelines) will allow will be considered an "INDUCEMENT" to purchase and your maximum loan will be reduced by the approximately the amount over the max allowable concession is (the actual formula reduces the purchase price but the net result is similar). Essentially you're bringing in that extra 0.5% you're getting a credit for so it washes at the closing table. The net result is a confusing HUD-1 settlement statement.

Here is an excerpt from a HUD Appraiser article with regards to concessions and why excessive concessions (those above the allowable limit, whether it's FHA or conventional financing) can negatively effect valuation in an area. An actual appraiser or possibly a HUD consultant could better comment on this.

While the first paragraph is a direct reference to condo's, the second pragraph is not . This gives you a glimpse of how an appraiser is looking at this and as a result, how the underwriter will read and respond to it as their report has to do with the collateral your loan is associated with and therefore is very relevent to an underwriter.

The words, "housing bubble of the last decade" comes to mind.

---start excerpt---
...there have been numerous reports of buyers of condominiums located within projects with slow sales receiving concessions of pre-paid condo fees for 6 to 8 or more months. It is difficult to make a case that such a concession (often providing a savings to the borrower of several hundred dollars per month) did not influence the price paid.

In some housing markets, ignoring sales concessions and failing to recognize the impact they can have on the price paid for a home can easily lead to overvaluation when some or all of the comparable sales relied upon in an appraisal had a sales concession which was not adequately addressed in the appraisal.
Web Reference:  http://RobWeber.com
0 votes
Karen Parsons…, Agent, Laguna Beach, CA
Tue Oct 25, 2011
Hi,

Lenders have different guidelines...but the essence is they only want to lend on the value of the home, not the costs to buy it. I would talk with your lender, though....3.5% really shouldn't be a problem.

Karen
0 votes
Thomas Bohlm…, Agent, Rolesville, NC
Tue Oct 25, 2011
Seller Consession can devalue the home to the appraisers.

Thus the home may not appraise for FULL amount but for the amount minus seller conssessions.

Good Luck
0 votes
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