How much can Sellers contribute towards Closing Cost?

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If negotiated in your purchase and sales agreement, a Seller may agree to chip in towards some or all of your bona fide closing costs, prepaids and reserves.  They cannot contribute towards your down payment.  The amount the seller can contribute varies depending on the program type and the amount of home buyer’s down payment. The percentage is based on the sales price and if the credit exceeds the closing cost, the mortgage originator can often use it towards discount points to buy down the interest rate.

Conventional: Fannie Mae/Freddie Mac – Owner Occupied

  • 25% or more down payment = 9% allowed seller contribution
  • less than 25% down and up to 10% down payment = 6% allowed seller contribution
  • less than 10% down payment = 3% allowed seller contribution
  • Fannie Mae Homepath:  less than 25% down = 6% allowed contributions; 25% down or more = 9% allowed contributions

Conventional: Fannie Mae/Freddie Mac – Second Home

  • 25% or more down payment = 9% allowed seller contribution
  • less than 25% down and up to 10% down payment = 6% allowed seller contribution

Conventional: Fannie Mae/Freddie Mac – Non-Owner Occupied/Investment (including Fannie Mae Homepath)

  • 2% maximum seller contribution

FHA:

  • 6% maximum seller contribution.  Seller contributions CAN include the upfront mortgage insurance premium.  NOTE:  There has been a lot of rumbling that the seller contribution is going to be reduced.  This has not happened as of this post.

VA:

  • 4% closing cost contribution and an additional possible 4% sales concession (i.e. paying off debts)

USDA:

  • No limit to how much sellers can contribute (is limited by actual closing costs/prepaids).   NOTE: When a home appraises higher than the sales price, closing costs can be financed with USDA rural loans up to the difference between the sales price and appraised value.

It’s very important that you let your mortgage originator know if you’re working with a seller contribution (or any contribution) towards closing cost.  It’s also a good idea to have your real estate agent contact your mortgage originator before presenting an offer so that everyone is on the “same page” with the contributions that are potentially being proposed in a real estate transaction.

The only time I’ve seen issues with closing costs contributions is when it has not been communicated to the the lender.  Contributions from real estate agents towards closing costs are treated the same as a seller contribution so it may be possible to have “too much credit”.   When this happens, contributions are treated as sales concessions which is a different animal than a seller contribution.

Also be aware that some lenders may have their own guidelines (underwriting overlays) that reduce or impact the allowed contribution limits stated above.

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Comments

  1. Thanks for the update on all these rules, Rhonda. You make a point about using the word seller “contribution” and seller “concession” I often get calls from appraisers and other agents asking whether there were any seller “concessions” and I think they really must mean “contributions” Now I guess I’ll have to ask them to clarify ..?? (PS I did read your other post about the differences in meaning)

  2. Cheryl, I have the allowed contributions for investment in the post – right above the FHA info: 2% for conventional unless it’s a Fannie Mae Homepath…and I have those figures above.

  3. Hi Di, technically the contribution IS a concession since it’s a cash incentive to purchase the home and it’s not real estate or part of the real property.

    Lenders refer to funds paid for by the seller as a contribution as long as it meets the guidelines…guess it sounds better than concession! :)

    We don’t have to make adjustments to the sales price/loan amount unless the “contribution” exceeds the amount allowed per guidelines.

  4. Anthony Z says:

    Outstanding post! Thank you so much for including the limits on seller contributions for investment properties.

  5. Is there any way to get more than the 2% Non-Owner Occupied/Investment maximum seller contribution on Conventional: Fannie Mae/Freddie Mac financing?

    Such as having them pay certain cost.

    • not that I’m aware of Fred. The 2% is based on the sales price and applies towards all bona fide closing costs, prepaids and reserves. If you want to reduce closing cost, you can speak with your mortgage professional about seeing if you can use rebate pricing (increasing the interest rate to create a rebate credit that can be used towards closing cost).

      • Went to an investors meeting today and was told that the 2% rule would not apple to me as I put 25% down and don’t have PMI insurance. Would this be correct.

        • Hi Fred, for conventional financing, 2% is the maximum contribution by a seller for an investment property regardless of the loan to value. You only need a 20% down payment to avoid mortgage insurance (pmi).

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  1. [...] with conventional financing at 5% down, the seller can contribute up to 3% of the bona fide closing costs, prepaids and reserves. Buyer must meet the down payment [...]

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