What Are Seller Contributions?

For some time now, homebuyers have been using the power of seller paid contributions to structure a transaction to best fit their needs. There are many uses for seller paid contributions and each mortgage program has specific guidelines relating to the use of them.

What are they?

A seller contribution is when the seller contributes a portion of the sales price of a home to the buyer during a real estate transaction. The most popular use of seller contributions is to assist the buyer with paying closing costs. So why would any seller ever want to do this? There are a number of reasons why a seller would do this, but in general it is a way for a property seller to increase the pool of potential buyers of their property. Let's look at a particular example: Jim Seller is selling his house to Tom Purchaser. Tom Purchaser just recently graduated college and is short of funds right now. His closing costs for this purchase are $3,000. Jim Seller has determined that he wants to walk away from the sale of his home with $97,000 in his pocket. So, here is what you would do to accomplish seller paid closing costs: Jim and Tom would agree on a sales price of $100,000. Within the purchase agreement, Jim and Tom agree that Jim will contribute $3,000 to Tom's closing costs. So, we have a win-win situation. Jim will walk away with $97,000 ($100,000 sales price - $3,000 seller contribution = $97,000). Tom will purchase the home and won't have to come to the closing table with his $3,000 closing costs because Jim paid them for him.

What are the restrictions on mortgage products and the amount of contribution that is permitted?

Please keep in mind that mortgage programs change frequently and the following guidelines are subject to change at anytime. Please visit http://www.noblelenders.com/ often for program updates. As of today 3/18/08, you are able to receive a contribution of 3% on Fannie Mae and Freddie Mac (agency) products above 90% LTV (loan-to-value ratio). If your LTV is 90% or below (you are making at least a 10% down payment), you are eligible to receive up to 6% seller contributions. For FHA loans, 6% seller contributions are permitted. In most cases, the seller contributions can be applied toward non-recurring closing costs (appraisal fee, escrow fee, etc.), and pre-paid items (hazard insurance, taxes). Seller contributions MAY NOT be applied toward the actual down payment. All percentages are calculated based on the sales price of the property ($100,000 sales price * 6% = $6,000 seller contribution).

Seller contributions continue to gain in popularity as a means to structure a transaction to best fit one's needs. Check for future postings that discuss other popular ways to use seller contributions.