What Is Seller Contribution in Real Estate?

Seller contributions in real estate represent a financial arrangement where a property seller agrees to cover certain costs typically borne by the buyer. It allows buyers to allocate more of their available funds towards a down payment or simply less cash needed at closing.

Defining Seller Contributions

Seller contributions, also known as seller concessions or seller assists, involve the seller paying a portion of the buyer’s expenses related to the home purchase. The seller does not give cash directly to the buyer; instead, funds are applied to specific costs at closing. Sellers might offer these contributions for various reasons, particularly in a buyer’s market or when they are motivated to sell the property quickly. Alleviating buyer out-of-pocket costs makes a property more attractive, potentially leading to a faster sale. For buyers, these contributions can make homeownership more accessible by reducing the amount of cash required at the closing table, which can be particularly helpful for first-time homebuyers.

Allowable Uses of Seller Contributions

Seller contributions can cover a range of specific buyer-related costs and expenses associated with purchasing a home. These funds apply to closing costs, which often range from 3% to 6% of the home’s price. Common examples include loan origination fees, appraisal fees, and title insurance premiums.

Additionally, seller contributions can be used for attorney fees, processing fees, and various inspection fees. They can also help cover discount points, which allow a buyer to lower their mortgage interest rate. Prepaid expenses, such as prorated property taxes and homeowner’s insurance premiums, are another common use for these contributions.

Limits on Seller Contributions

The amount a seller can contribute is subject to specific limits determined by the type of loan the buyer obtains. These limits exist to prevent inflated home prices and to manage risk for lenders. The maximum contribution is a percentage of the sale price or appraised value, whichever is less.

For Federal Housing Administration (FHA) loans, sellers can contribute up to 6% of the purchase price. If a seller offers more than this 6% limit, the excess amount can reduce the home’s sale price for the purpose of calculating the FHA loan amount.

Veterans Affairs (VA) loans have a limit of 4% of the home’s reasonable value for seller concessions. Certain closing costs, such as the VA funding fee, are not counted toward this limit.

Conventional loans, which adhere to guidelines set by Fannie Mae and Freddie Mac, have varying limits based on the buyer’s down payment. If the down payment is less than 10%, sellers can contribute up to 3% of the sale price. For down payments between 10% and 25%, the limit increases to 6%, and for down payments exceeding 25%, sellers may contribute up to 9%. For investment properties, conventional loan seller contributions are limited to 2% regardless of the down payment.

Integrating Seller Contributions into a Real Estate Deal

Seller contributions are negotiated during the offer and negotiation phase of a real estate transaction. A buyer or their agent can request these contributions as part of their initial offer or during counter-negotiations. The amount can be specified as a fixed dollar amount or as a percentage of the purchase price.

Once agreed upon, the terms of the seller contribution must be formally documented within the purchase agreement. This contract outlines the specific amount the seller will contribute and how it will be applied to the buyer’s costs.

At the closing of the transaction, the agreed-upon seller credit is reflected on the Closing Disclosure, which is a standardized form detailing all financial aspects of the transaction. The credit reduces the cash amount the buyer needs to bring to the closing table, as the funds are transferred directly within the settlement process rather than as a direct payment to the buyer.