South Bend Home Loan

Wednesday, December 31, 2014

Sales Contribution or Sales Concession?

I have to admit it, I occasionally speak in mortgagese.  I'll be meeting with a home buyer and speaking perfectly normal English when suddenly I hear myself using words like 'escrow account', 'conditional commitment letter' and 'seller contributions'. 

These terms make complete sense to me but to the new home buyer?  I might as well be speaking a different language.  They have no idea what I'm talking about. 

To help you understand this lingo too, let me provide a little education on one of the most common terms used - seller contributions.

What is a Seller Contribution?

Seller contributions is a generic term we use in the mortgage and real estate industry to reference things given to the buyer from the seller.  Technically, though, contributions from a seller can consist of two different components - sales contributions and sales concessions. 

OK...Then what are Sales Contributions and Sales Concessions?

Let me break these out:
  • Sales Contributions - these are any closing costs or prepaid items that are normally paid by the buyer when getting a mortgage that will instead be paid by the seller.  These can include things like loan approval costs, the appraisal, title work, home insurance, etc. 
  • Sales Concessions - these are physical items or money given to the buyer by the seller, often as an inducement to purchase the home.  Sales concessions would be things like furniture, vehicles, weekend getaways, rebates or, most commonly, carpeting or repair allowances.

Are both Sales Contributions and Sales Concessions Allowed?

Yes, they are both technically allowed, but they have to be treated differently.

Sales contributions are allowed up to a maximum percentage of the home price.  If the buyer is getting a conventional mortgage, a seller can give up to 3% of the sales price of the home toward the buyers closing costs, prepaid items and inspections.  If the buyer is getting a FHA mortgage, a seller can give up to 6% of the home's price.  If the seller chooses to do this, it does not alter the terms or process for the buyer's mortgage approval.  As long as the contribution doesn't exceed that 3% or 6% maximum limit, all is good.

Sales concessions are treated differently though.  When they exist, the lender has to manually reduce the price or appraised value (whichever is lower) by the value of that concession prior to calculating how much they will lend to the buyer.  Because of this, the buyer typically has to bring more money to the closing then they would have otherwise to cover that difference

Does This Impact How I Write My Offer?

Yes, it does.  Knowing that these things are treated differently, you'll want your Realtor to write up your purchase agreement to work within these rules. 

Let's say that the seller was offering a $2,000 carpet allowance.  If the purchase agreement said "$2,000 carpet allowance from seller", that would be viewed as a Concession and that $2,000 would need to be deducted from the price before the lender set your loan amount, which would work against you. 

BUT - if instead your Realtor asked for $2,000 in seller contributions toward your closing costs and prepaid items, that would be fine.  It wouldn't change your mortgage terms at all.  You could then use the $2,000 you had saved up for your closing costs and instead use it for new carpet.

What if you want the seller to pay for your closing costs, though, and you also want the carpet allowance?  Then you're in a tough spot.  In situations like that, you'll typically want the seller to contribute towards your closing costs and then actually install the carpeting upfront instead of giving you money to do it later.  Or, you can have the seller drop the price by the $2,000 and figure out a way to replace that carpet yourself down the road.

There are multiple ways to address things like this, and you don't need to know them all.  You DO need to be working with a knowledgeable mortgage lender and Realtor, though, to guide and educate you on your options. 

I'd be honored to be that mortgage lender!  To apply for your fast, free mortgage preapproval, click here -Apply Online.

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.
Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.