VA mortgage loans can be very confusing when it comes to seller contributions. There are no state-by-state guidelines regarding what the seller can pay for in a VA purchase mortgage transaction. Each lender may apply their own requirements for a VA loan.
The VA defines seller concessions to be limited to payment of the buyer's VA funding fee, pre-paids of property taxes and homeowners insurance, and payment of credit balances and judgments on behalf of the buyer. It does not mention closing costs but a seller can pay these costs if it is listed on the purchase agreement. A trusted real estate agent will be able to help craft a purchase agreement so that all of the costs can be paid by the seller.
Four Percent Rule
Many lenders in today's environment are using the four percent rule, which will not allow the seller to pay more than four percent of the purchase price toward buyer costs. However, in many markets, a four percent concession should be more than enough to cover all the costs. When discussing financing with a lender you should ask for a good faith estimate of costs to get a better idea of what is involved.
Non-Allowable Closing Costs
There are fees that VA does not allow the buyer to pay that the lender may charge. These may include FHA/HUD required inspections or prepayment penalties to pay off a current lien. Your real estate agent can pay these fees out of their commission. The lender may also pay for these fees. One common way is to increase the rate to cover any non-allowable fees. Points may also charged to the buyer to cover these fees.
- Veterans Administration; Closing Costs Common Fees & Charges for VA Guaranteed Home Loan Purchases
- Zillow; Who Pays Non-Allowable Closing Costs
- Veterans Administration Lenders Handbook: VA Lenders Handbook
- Nolo. “Seller Financing: How It Works in Home Sales.” Accessed March 9, 2020.
- New York State. “Real Estate License Law,” Page 37. Accessed March 9, 2020.
- Federal Reserve Bank of St. Louis. “Local Predatory Lending Laws: Going Beyond North Carolina.” Accessed March 9, 2020.
- Cailber Law, S.C. "Land Contracts.” Accessed March 9, 2020.
- California Legislative Information. "Article 3. Disclosures on Purchase Money Liens on Residential Property." Accessed March 9, 2020.
- LendingTree. “Your Guide to Rent-to-Own Homes.” Accessed March 9, 2020.
- IRS. “Topic No. 705 Installment Sales.” Accessed March 9, 2020.
Michael Carpenter has been writing blogs since 2007. He is a mortgage specialist with over 12 years of experience as well as an expert in financing, credit, budgeting and real estate. Michael holds licenses in both real estate and life and health insurance.