There’s much misunderstanding in the Lending industry, even amongst Loan Officers and Underwriters regarding how much the Dept of VA allows a Seller to contribute. The confusion arises from misinterpreting the VA’s definition of “Seller concessions”.
You see, in the VA’s eyes, the term seller concession does NOT apply to normal closing costs- it is anything other than normal closing costs also known as an inducement to purchase- The official definition (updated in 2010 by VA), reads like this
. . . a seller concession is anything of value added to the transaction by the builder or seller for which the buyer pays nothing additional and which the seller is not customarily expected or required to pay or provide.
Seller concessions include, but are not limited to, the following:
- payment of the buyer’s VA funding fee
- prepayment of the buyer’s property taxes and insurance
- gifts such as a television set or microwave oven
- payment of extra points to provide permanent interest rate buy downs
- provision of escrowed funds to provide temporary interest rate buy downs, and
- payoff of credit balances or judgments on behalf of the buyer.
Seller concessions do not include payment of the buyer’s typical closing costs, or payment of points as appropriate to the market. For Example: If the market conditions are that Interest rate of 5.00% costs 1 discount point, the seller’s paying of that point would not be considered a seller concession. If the seller paid three points however, two of those points would be considered a seller concession.
The cap on seller concessions is 4%. So what about closing costs? Well technically the Dept of VA doesn’t have a written cap on the amount of closing costs except they are supposed to be normal, customary and common for the local market. Most lenders count this as 4% of the purchase price.
Therefore, between payment of customary closing costs and seller concessions, the total contribution from Seller can be as high as 8% of the purchase price.
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