When a buyer is getting a mortgage to buy a home, there may be repairs or issues that the seller needs to remedy. Frequently, the remedy is to offer closing cost credits to the buyer. Clients ask me if there is a maximum amount of seller credits that a seller cannot exceed? In the mortgage industry we have another name for seller credits. We also call them interested party contributions. Whether a credit is given to a buyer from a seller, a realtor, or a lender, they’re all considered interested parties. And regardless of who the credit is coming from, there are limits as to how much it can be.
The following are the current limits for Conventional Conforming loans:
3% for a principal residence or second home loan greater than 90% loan-to-value.
6% for a principal residence or second home loan from 75.01% to 90% loan-to-value.
9% for a principal residence or second home loan at 75% loan-to-value or lower.
2% for investment property for all loan-to-values.
It’s important to note that there must be enough closing costs to fully utilize the dollar value of the credit. Credits are a use it or lose it proposition. Let’s assume closing costs are $10,000 and your credit is $15,000. You would be leaving $5,000 on the table unusable. This is because a buyer is not allowed to receive cash above and beyond the amount of the closing costs. If that were to be allowed, then a seller could contribute to a buyer’s down payment. And that is a big no-no.
For FHA Loans
Credits to the buyer are limited to 6% of the sale price of the home for FHA loans. The 6% rule applies to all loan amounts regardless of loan-to-value. The credits can be used to pay some or all the borrower’s closing costs. However, these funds can never be used as part of the down payment.
For VA Loans
The maximum credit is 4% of the sales price for a VA loan. Any seller credits which exceeds 4% of the established reasonable value of the property is considered excessive, and unacceptable for VA loans.
This means the seller could pay all of a buyer’s closing costs, unless there are very costly discount points or an expensive rate buydown. If there are discount points which are considered excessive then those usually must be paid by the veteran, outside of any closing cost credit.