The following blog contribution comes from our own Hugh Page of FM Lending located at our Fonville Morisey Falls Office in Raleigh. If you’re looking to purchase a home in the Raleigh-Durham-Chapel Hill and surrounding areas, he provides great insight on what types of “Seller contributions” can work for you. Take a look!
Make Seller Contributions Be Your Friend
A “seller contribution” can be a buyer’s best friend. Also known as “seller paid closing costs” or “interested party contributions”, that’s when the seller of a home agrees to pay some money from the proceeds of the sale of their home towards the buyer’s closing costs. The main effect of this tool is to reduce the amount of cash a buyer needs for closing and it may often mean the difference between a sale of a home and no sale.
The most common obstacle for homebuyers to consummate the purchase of a home is coming up with the required assets needed for both a down payment and the associated closing costs.
Many people can qualify for the payment on a home mortgage but encounter challenges in gathering the necessary cash. Sometimes folks just don’t have a lot of ready cash at the moment they find that dream home. Seller contributions are not something to be afraid of and are quite legitimate. An experienced real estate or mortgage professional, such as the folks at FM Lending Services, or Fonville Morisey Realty are skilled in structuring transactions with seller contributions and can assist you.
There are many other benefits of utilizing a seller contribution.
Using the money from a seller contribution for the closing costs can free up more cash for a larger down payment. In some cases this can reduce or even eliminate the need for private mortgage insurance (PMI) and can thereby save the borrower significant costs each month in PMI charges. Sometimes freeing up more cash for a larger down payment may make it possible to achieve a better loan to value ratio and improve the interest rate on the loan.
If the borrowers have consumer debt with high monthly payments that are preventing them from qualifying, they can use the seller contribution for costs and use other money to pay off some or all of those debts. This allows them to potentially qualify for a loan they otherwise would not have been able to obtain by significantly reducing their overall monthly payments.
Additionally, most closing costs are not tax deductible; however, discount points are still tax deductible. If paying discount points, it may be smart to use a seller contribution because while the seller pays the points, they are still tax deductible to the buyer.
Seller contributions can be negotiated at the time of a home purchase by having the seller pay closing costs rather than or in addition to a reduction of the home sales price.
A Seller contribution is easy to implement and there are typically no negative tax consequences. A seller contribution must be fully disclosed on the sales contract and the amount of seller contributions cannot exceed the actual amount of the closing costs. Different types of loans also have a certain maximum amount of closing costs that can be paid by the seller. So, be careful and make sure you consult with your real estate professionals to be sure you don’t do something that will cause a problem later. For instance, on any conventional conforming loan transaction where the down payment is less than 10%, the maximum amount of money the seller is allowed to pay towards closing costs is 3% of the sales price. Other loan programs have different requirements.
As you can see, Seller contributions can be your best friend!