You find the home you've been waiting to write an offer on and the Seller has patio furniture (or a bbq, riding lawnmower, furniture, etc.) that you'd like to make part of deal. Perhaps the Seller's offering to leave you these items because it's convenient for them as well. You and the seller include the items as part of your real estate purchase and sale agreement. The agent is keen to include on the addendum that these items "have no value"…which may be true or it may be just to try to avoid having to deal with having a sales concession.
A sales concession is something that is not part of the real estate, such as cash, furniture, automobiles, decorator allowances, moving costs, or other "giveaways". The value of the sales concession must be deducted from the sales price when calculating loan to values.
For example, if you have a sales price of $200,000 and patio furniture valued at $3,000; the sales price the lender will use is $197,000 (200,000 – 3000). Let's assume you're putting 10% down payment. Without the sales concession, 10% down would be $20,000. With the sales concession, 10% down is going to be a bit more:
The loan amount would be based on 90% of the adjusted sales price of $197,000: $177,300. However the sales price, per the purchase and sales agreement is $200,000. So the down payment would be $22,700: $200,000 less the loan amount $177,300.
The underwriter may (or may not) call for the concession item to be appraised or other supporting documentation to determine what the value is (or isn't)–even if the purchase and sale agreement states there is no value and the item was just left for convenience.
It may sound silly or nit-picky to you…but would you buy the home at $200,000 without the concession? The lender does not want the concession to be a part of what's factored into the financing. If you have a significant down payment, this may not impact you. Even with a 20% down payment, it could.
20% down payment of $200,000 equals a loan amount of $160,000. With a sales concession of $3,000; this can be treated a couple of ways:
- Sales price is reduced by the concession to $197,000 (in the lenders eyes). 20% down payment based on 197,000 equals a loan amount of $157,600. $157,600 less the actual contract sales price of $200,000 equals an actual down payment of $42,400 in order to have the mortgage still treated as an 80% loan to value with no private mortgage insurance or…
Sales price is still reduced to $197,000 and the loan amount remains $160,000. Now the lender will treat this as mortgage with a loan to value of 81% which means: private mortgage insurance…even though the borrower is putting $40,000 down (20% of $200,000).
So you may want to think twice before you include items that are not real property in your purchase and sale agreement…unless you're putting a significant amount of funds towards your down payment or the items are truly worthless and you can prove it to the underwriter.