A seller can make financing concessions to a buyer using a government-backed loan. Concessions make it easier for buyers to cover closing costs. The Federal Housing Administration and the Department of Veterans Affairs protect lenders that make these loans, reimbursing them if borrowers default. As such, FHA and VA lenders can finance borrowers with a minimal down payment and no down payment, respectively. The government programs also welcome borrowers with credit challenges who have difficulty gaining conventional financing.
The general public, including borrowers with moderate incomes, can qualify for FHA financing. FHA's mortgage insurance program requires borrowers to pay a monthly fee for the coverage, which is also charged up-front at closing. The VA guarantees a portion of the loan amount, which is made only to veterans and certain relatives of deceased or disabled veterans. Unlike the FHA, the VA does not charge a recurring fee for the guarantee; however, it does charge a lump sum at closing.
Closing costs on an FHA and VA loan typically range between 3 percent and 5 percent of the sale price. Closing costs also vary by location. Borrowers in New York, Texas, Pennsylvania, Florida and Oklahoma can expect to pay the highest amount in closing costs, according to a 2012 survey by Bankrate.com. Local real estate tax rates, government and escrow fees also affect the amount due at closing.
The FHA and VA limit the amount of concessions a seller may pay on the buyer's behalf. Concessions usually cover closing costs, but may also include tangible items such as appliances or upgrades to the property. The FHA allows sellers to pay a maximum of 6 percent of the sale price toward any of the buyer's closing costs, with the exception of a tax service fee. The VA allows sellers to pay all closing costs, without a percentage cap; however, it does limit how much the seller can pay to lower the buyer's interest rate or pay off his debts to 4 percent. Only costs considered reasonable and customary for the buyer to pay, are covered by seller concessions.
Seller concessions may exceed the FHA's 6 percent limit, but result in a dollar- for-dollar reduction to the loan amount. Also, the 6 percent max applies to the lower of the home's appraised value or the sale price. Seller concessions may be used to pay the FHA's Up-Front Mortgage Insurance Fee (UFMIP), which is 1.75 percent of the loan amount. Concessions can also cover the VA's funding fee, which is 2.15 percent of the loan amount for first-time VA loans users and 3.3 percent for subsequent users with no down payment.
- VA Loans: VA Loan Guidelines VA Loan Closing Costs
- Home Buying Institute: Closing Costs on FHA Home Loans: 2013 Update Read more: http://www.homebuyinginstitute.com/mortgage/closing-costs-on-fha-home-loans/#ixzz2RJsrZoI9
- Bankrate.com: 2012 Closing Costs: State Ranked
- VA Loan Guidelines: 2013 VA Loan Sellers Concessions
- FHA.com: FHA Seller Concession Rules and Possible Changes
- HUD: Handbook 4155.1
- FHA.com: FHA Announces Mortgage Insurance Premium Increase
- VA Loans: Current VA Funding Fee
- Comstock/Comstock/Getty Images