Sometimes you just can’t afford the closing costs on a loan. The good news is that it doesn’t have to prevent you from buying a home if you get USDA financing. The USDA allows sellers to provide up to six percent of the sales price of the home in seller concessions.
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What are Seller Concessions?
The seller can pay money towards your closing costs for you – that’s seller concessions. In some cases, sellers concede money because of necessary repairs or cosmetic changes that they don’t want to make and would rather just pay you for. Either way, they are limited to a six percent maximum.
While it sounds like the seller is being generous and giving you money, in reality, you are paying for them in your loan. Sellers will usually negotiate the sales price of the home high enough to cover the amount they agreed to give you. As long as the sales price is less than or equal to the appraised value, you should be good. Something to remember, though, you’ll have a higher loan amount to take into account the seller concessions.
Can Sellers Pay All of Your Closing Costs?
If your closing costs don’t exceed 6% of the home’s sales price, then yes, the seller can pay all of your closing costs. This could mean that you come to the closing with no money of your own. The only exception would be if you were sitting up an escrow account to pay your real estate taxes and homeowner’s insurance. You may have to bring cash to put a little money in that account.
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Shop Around for a Lender
Just because the seller agrees to pay your closing costs for you doesn’t mean you should just use any lender. You should still shop around to find different lenders. Remember, just because the seller is paying your closing costs now doesn’t mean you aren’t paying for them in the end.
You increase your loan amount in order to account for the higher sales price of the home. This means you are paying for the closing costs over the life of the loan. Those closing costs will now cost you a lot more in the end because you’ll pay interest on the money you borrowed.
If you shop around and find a lender willing to negotiate closing costs with you, the new loan amount may not be as high as you feared. You can even negotiate a no-closing-cost with a lender. Rather than the seller paying the closing costs for you, the lender pays them. In exchange, the lender will charge you a slightly higher interest rate – usually 0.5%. You can compare the two options to see which loan payment would be the most affordable and which loan would come out the cheapest after you pay the full loan back in 15 – 30 years.
You want to keep an eye on your bottom line when determining if seller concessions is worth it. Do you want the higher loan amount? Can you afford the higher payment? Does it make sense to wrap the costs into the loan like that or can you negotiate help in some other way? Whether it’s the lender that cuts you some slack on the costs or you receive gift money from relatives, there are other ways around seller concessions if you don’t want to increase your USDA loan amount.