Can a Seller Pay a Down Payment on a Conventional Loan?

Homebuyers often wonder if a seller can contribute to their down payment on a conventional loan. While direct payment towards the down payment is not allowed, sellers can offer financial assistance in other ways to facilitate a home purchase. Understanding these contributions is important for both buyers and sellers.

Understanding Seller Contributions

Sellers cannot directly provide cash for a buyer’s down payment on a conventional loan. Instead, they can offer “seller concessions,” “seller credits,” or “Interested Party Contributions” (IPCs). These financial benefits are applied toward various costs associated with the home purchase. By covering these expenses, seller credits help buyers manage their overall funds.

Seller contributions are an agreement where the seller pays for specific costs typically the buyer’s responsibility. This arrangement is often negotiated as part of the purchase agreement. The goal is to reduce the buyer’s out-of-pocket expenses at closing, making homeownership more accessible.

Permissible Uses of Seller Contributions

Seller contributions on conventional loans are designed to cover closing costs and prepaid expenses. These funds cannot be used for the actual down payment, principal reduction, or cash back to the buyer. Any excess concessions beyond allowable uses must be returned to the seller.

Seller contributions can cover various costs, including:
Loan origination fees
Appraisal fees
Title insurance
Escrow fees
Property taxes
Homeowner’s insurance premiums
Discount points to reduce the interest rate
Up to 12 months of homeowner’s association (HOA) dues

Limits on Seller Contributions

Conventional loan guidelines, primarily set by Fannie Mae and Freddie Mac, establish specific limits on seller contributions. These limits are expressed as a percentage of the lower of the sales price or the appraised value. The maximum contribution varies based on the buyer’s loan-to-value (LTV) ratio, influenced by the down payment, and the property’s occupancy type.

For primary residences and second homes:
If the down payment is less than 10%, the seller’s contribution is capped at 3% of the sales price.
If the down payment is between 10% and 25%, the limit is 6%.
For down payments greater than 25%, sellers can contribute up to 9% of the sales price.
For investment properties, the maximum seller contribution is limited to 2% of the sales price, regardless of the down payment.

Incorporating Seller Contributions into the Loan Process

Including seller contributions in a real estate transaction requires clear documentation and adherence to specific procedures. Any agreed-upon contributions must be explicitly stated within the purchase agreement. This ensures both parties understand the financial terms of the sale.

During the loan process, these contributions are itemized on the Closing Disclosure (CD), which details all costs and credits. Lenders review these contributions to ensure they comply with conventional loan guidelines. This confirms the amounts and uses of seller concessions fall within established limits.