Closing costs can often be the barrier that keeps you from taking out a mortgage, since they can get costly. There are many loan programs that offer the ability of the seller to contribute to the closing costs, though, making it more affordable for you. Among those programs are the USDA programs. Before you jump in headfirst into the program, though, you should know what the USDA seller contribution limitations are so you can plan accordingly.
The Definition of Closing Costs
First, you should understand what closing costs are on your mortgage. These costs are those that coincide with purchasing a home and taking out a loan to do so. You will see fees that have to do directly with the loan, such as processing and underwriting fees as well as fees that pay the lender directly, such as origination fees or discount fees. There are also fees that the title company or closing agent charges to close, record, and fund the loan.
Typically, closing costs vary from loan to loan based on the amount of the loan as well as the program used. In some cases, there is more work that needs to be done on a loan, which usually means slightly higher fees in order for the lender to pay for the work that had to be done. Every lender charges different closing fees, which makes it necessary to shop around the find the most affordable fees for your circumstances.
The Definition of Seller Contributions
Seller contributions, as the name suggests, is the ability of the seller to help you pay the closing costs. This is something you agree upon before signing the housing contract. The seller can agree to pay a certain percentage of your closing costs or pay the entirety of them, depending on what he wants to do and can afford.
The seller contributions are created in the following way:
- You and the seller meet eye to eye on a selling price for the home
- Once that price is agreed upon, you agree on an amount of the closing costs the seller is willing to pay
- You both then agree to raise the selling price of the home the exact amount of the agreed seller paid closing costs
- The seller agrees to give the amount that is above and beyond the selling price of the home to your closing costs
The Amount of the USDA Seller Contribution Limitations
The looming question is, how much can the seller contribute? There is not an unlimited amount – every loan program has its maximums and the USDA is no exception. The USDA seller contribution limitations are 6% of the loan amount. This means if the loan amount is $100,000, the seller can provide the buyer with $6,000 towards his closing costs.
On top of the maximum allowed by the program, however, is the requirement that the seller concessions cannot exceed the actual closing costs. This means that the buyer cannot get any cash back as a result of an overage. The seller can only cover the closing costs dollar for dollar. In the above example, if the closing costs were only $4,000, then the seller could only contribute $4,000.
The Appraisal Plays a Role
One of the most important factors in considering seller’s concessions is the appraised value of the home. No seller, no matter how willing, can provide money to the buyer for closing costs if the value of the home is not there. This means that the appraised value needs to come back at least at the amount of the adjusted sales price when you account for the closing costs. If the value comes back at the agreed upon sales price and that’s it, then the buyer must pay the closing costs on his own.
The USDA seller contributions limitations are fairly consistent with other similar loan types – the FHA loan allows 6%; the VA loan allows 4%; and the conventional loan allows 9%, but the conventional loan closing costs are typically higher than any other loan program.