Sales Concession (seller concession)- Cash or items of value, such as give-aways, passed to the purchaser by the seller to encourage the buyer to purchase the property.
They may include vacations, automobiles, golf carts, furniture, gift cards, memberships in sports clubs, etc.
Typically these items do not stay with the home.
Sales Concessions must be deducted from the lesser of the sales price or the appraised value before determining the loan amount.
Financing Contribution (seller contribution)- Closing costs associated with a home purchase paid by the borrower are considered contributions if they are paid by another party.
They may include interest rate buy downs, escrow set ups (pre-paids), survey, tax transfers, and title fees.
Common Allowed Contributions:
Interest rate buy downs
HOA dues (New Const. may be allowed more than a Resell)
Origination fees/discount points
Title fees
Appraisal fee
Tax transfers
Lender fees (underwriting, processing, etc)
Escrow set up fees( insurance, prepaid interest, etc.)
Basically, normal closing costs paid by the buyer
The maximum allowable contribution depends on:
Proposed occupancy-see below
LTV (Loan to Value)-1st mortgage vs. purchase Loan Program being used
In general for owner occupied and 2nd home purchases, the maximum contribution is between 3% and 9% of the purchase price.
6% is the most common allowed contribution.
Financing contributions are allowed up to 2% for investment purchases.
FHA programs allow for a 6% seller contribution
4 Types of funds needed at closing:
1. Down Payment
Based on what program the buyer chooses or what program they qualify for. Lenders typically require two months asset accounts to verify the borrower has enough liquid funds to bring to closing.
Allowed sources for deposits / funds to close:
Payroll
The sale of investments ( with paper trail)
Tax refunds
Proceeds from sale of home (HUDs)
Common types of sources that are not allowed:
Cash on hand
Gambling winnings
Cash advances
The sale of undocumented personal property
Gift Funds
For conventional loans: the borrower must generally still make the required minimum cash down payment of 5% from his or her own funds. If the down payment is 20% or more, the entire down payment may be a gift.
FHA loans: 3% or more gift funds are allowed
Generally, a borrower can use funds obtained as a gift (or grant) to satisfy part of the cash requirement for the down payment and closing only if the donor is a relative (the borrower's spouse, child or dependent or any other individual related to the borrower by blood, marriage, adoption, or legal guardianship), domestic partner, fiancé, a church, municipality, or nonprofit organization. A gift letter will need to be completed on the lender’s form.
2. Prepaids
These are typically the same regardless of the lender the buyer selects.
First year of insurance
Escrow account set up (2 to 3 months reserves for taxes, insurance, and PMI)
Upfront HOA Dues
Prepaid interest (depending on the date of closing)
3. Closing Costs
Closing costs vary greatly between lenders. They include common 3rd party fees like the appraisal, credit report, title fees, state tax, recording fees, etc.
Common Lender Fees may include underwriting, processing, doc prep, origination, discount points, admin fee. Competitive “lender fees” should be $200 to $500 in total.
4. Reserves
Reserves are not needed at closing, but need to be verified in acceptable asset accounts on top of down payment and closing costs requirements.
Accounts do not need to be liquid – 401k, Kapers, IRAs, etc. are allowed ( usually 70% of the value)
Depends on loan program the borrower is selecting.
Reserve requirements required by lender will typically range from 0 to 6 months.
Gift funds are generally not allowed for reserves
Please email me anytime you have questions at Jon_Platz@Countrywide.com
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