Seller Concessions on VA Loans
According to the VA Lender’s Handbook, “Any seller concession or combination of concessions which exceeds 4% of the established reasonable value of the property is consider excessive and unacceptable for VA-guaranteed loans.” However, the VA Lender’s Handbook goes on to say “Do NOT include normal discount points and payment of the buyer’s closing costs in total concessions for determining whether concessions exceed the 4% limit”.
It’s that second sentence that seems to go unnoticed by most people -- lenders included. This month’s newsletter is my attempt to set the record straight and get all of us on the same page. (Send an email to chad@vu.com if you have any questions at all about what is written below.)
Let’s break this down one piece at a time…
What is a “seller concession”?
According to the VA, a seller concession is anything of value added to the transaction by the builder or seller for which the buyer pays nothing additional and which the seller is not customarily expected or required to pay or provide. Seller concessions are also sometimes referred to as “seller contributions”. For the purpose of this newsletter, we will assume they are the same thing since they are often used interchangeably.
What specific items does the VA include in the 4% cap?
The VA considers all of the following as seller concessions to be INCLUDED in the 4% cap when paid by the builder or seller:
- Temporary buydowns (like a 2/1 Buydown)
- Buyer’s prepaid tax and insurance escrows
- Paying off credit cards or judgments on behalf of the buyer
- Excessive discount points for permanent rate buydowns
- Generally this would be anything over 2 discount points
- An additional 1 point would be acceptable (not considered excessive) if the lender does not charge any lender fees
- Buyer’s VA funding fee (up to 3.30% of the loan amount)
- Non-standard items included in sales contract, such as a TV, pool table, play set, microwave oven, etc.
How is the value of “non-standard items” calculated for this purpose?
To provide evidence of the reasonable value of items included in the contract, you need to provide documentation for items of similar age, condition, and value utilizing non-interested, non-evasive third parties such as Craigslist or eBay.
What is “the established reasonable value of the property”?
On a VA loan, the established reasonable value of the property is determined by the Staff Appraisal Reviewer (SAR), usually the underwriter, when they review the VA appraisal and issue the Lender’s Notice of Value (NOV). The value of the property stated in the NOV is the value the VA is referring to on which the 4% seller concessions cap is calculated.
What are “normal discount points and buyer’s closing costs”?
The VA says these items are specifically EXCLUDED from the 4% cap, so it’s important we define what these exclusions are:
- Normal discount points are generally considered up to 2 points, or 2% of the loan. If the lender is not charging any lender fees, then an additional 1 point, or 1% of the loan, would be considered "normal".
- Example #1: The seller pays 4 points to permanently buy down your rate and your lender is charging a 1% origination fee. In that case, 2 of those 4 points would be considered "excessive" and therefore included in the 4% cap for seller concessions.
- Example #2: The seller pays 3 points to permanently buy down your rate and your lender is not charging any lender fees (which applies to our Austin and Killeen branches). In that case, all 3 points would fall within the definition of "normal" discount points and would therefore NOT be included in the 4% cap for seller concessions.
- Standard items in the house are EXCLUDED from the 4% limit. A good example being a washer and dryer left in the home.
- Buyer’s closing costs are also EXCLUDED from the 4% limit and include:
- Lender fees such as processing, underwriting, credit report, wire, flood cert, etc.
- Inspection fees such as appraisal, home inspection, pest inspection, septic, well water test, appraisal reinspection, etc.
- Title fees such as escrow/closing, endorsement, title insurance, document preparation, attorney, recording, tax service, survey, etc.
- Miscellaneous fees such as HOA transfer, HOA working capital, prepaid interest, etc.
If seller concessions cover everything, what can the buyer get back at closing?
In the case where the seller is covering all closing costs, and assuming the buyer does not have a minimum down payment required, then the VA buyer can get back their earnest and option money deposits and anything they spent on inspections. What they cannot get back is any amount over what they put into the transaction. For example, they cannot get back an additional $10,000 to put in new flooring or “in lieu of repairs”. (One exception may be seller funds put in an escrow holdback account for repairs to be done after closing, but that is a unique situation that requires prior approval on a case-by-case basis.)
What options does a buyer have if they don’t have money for closing and the seller is not willing to contribute anything?
One option is to apply for a Closing Cost Assistance (CCA) loan from Veterans United. When seller contributions are not available and VA buyers do not have the funds for their closing costs, Veterans United can help. Currently the minimum requirements include a 660 credit score for at least one of the borrowers on the loan and it is only on VA purchase loans. The terms are 60 months at a 12% interest rate and the minimum loan amount is $3,000. Eligible costs to be covered by the CCA program include closing costs, prepaid items, and up to 50 basis points (1/2 point). CCA cannot be used for permanent buydowns over ½ point or temporary rate buydowns, such as a 2/1 buydown. The monthly payment on the CCA loan will of course need to be included in your debt-to-income ratio for qualifying.
When does someone apply for CCA on a VA loan?
Initial approval to use CCA does not happen until you are under contract and your VA loan is in processing. Therefore, this program is not to be used for pre-approval. It is best for someone who perhaps had the funds to close at the time of pre-approval, but came up short after their loan was in processing. Or perhaps the appraisal came in short and that caused the sellers to reduce or remove seller contributions, so now the buyers need an alternative source to help cover closing costs. When using CCA, final VA loan approval from Veterans United will need to be obtained at least 3 business days prior to the closing date to allow time for the CCA program to be fully processed.
Got more questions about seller concessions on VA loans?
Email chad@vu.com as your lender and Herma Young 409-350-2877 or 832-819-4771
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