VA home loans permit the seller to contribute towards a borrower’s closing costs or provide other incentives to purchase a particular home. Such incentives can be a powerful negotiating tool when trying to decide whether or not to purchase a home with a VA loan, and borrowers should understand the VA loan rules for these contributions.
Such contributions are common, and depending on the nature of those contributions, in the VA Lender’s Handbook they are classified as “seller concessions”. Chapter Eight of the handbook describes these concessions as, “…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.”
These concessions are subject to a cap of four percent of the value of the property for VA loans. Chapter Eight instructs the lender, “Any seller concession or combination of concessions which exceeds four percent of the established reasonable value of the property is considered excessive, and unacceptable for VA-guaranteed loans.”
That said, there are some things that do not count towards that four percent limit. “Do not include normal discount points and payment of the buyer’s closing costs in total concessions for determining whether concessions exceed the four percent limit.”
What is considered a seller concession, as opposed to paying for certain closing costs as mentioned above?
“Seller concessions include, but are not limited to, the following:
•payment of the buyer’s VA funding fee
•prepayment of the buyer’s property taxes and insurance
•gifts such as a television set or microwave oven
•payment of extra points to provide permanent interest rate buydowns
•provision of escrowed funds to provide temporary interest rate buydowns,
•payoff of credit balances or judgments on behalf of the buyer.”
So we can see from the above that the seller paying a reasonable amount of discount points is not a concession, but paying “extra points” is. You may need to discuss these terms with your loan officer to determine what is considered reasonable and customary in your housing market. The VA Lender’s Handbook provides an example for further clarification:
“If the market dictates an interest rate of 7½ percent with two discount points, the seller’s payment of the two points would not be a seller concession. If the seller paid five points, three of these points would be considered a seller concession”. Talk to your loan officer for more information.