Deciphering the VA Lender’s Handbook Chapter 8 Part 3
Believe it or not, the VA puts a limit on just how generous the seller can be with handing out value to the borrower. Why? Because sellers will sometimes use excessive concessions to entice a borrower to an unfavorable mortgage or one that the borrower can’t really afford. While we all understand what seller concessions are, to clarify exactly what the VA means by ‘seller concessions’, we’ll use the following definition from the VA Lender’s Handbook: “ 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.” This definition will become important as we talk about what is allowed and what is not.
Common seller concessions include (but are certainly not limited to) 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, and payoff of credit balances or judgments on behalf of the buyer. According to the VA, a seller paying the buyer’s closing costs or discount points appropriate to the market are not considered a seller concession (this is a good thing, because these things are not factored into the overall value of seller concessions).
As mentioned above, issues with builders or sellers offering too much in the way of concessions can cause a veteran to get into a home mortgage that they can’t actually afford; their inability to qualify for the loan can be disguised by the excessive seller concessions, which act as ‘compensating factors’ throughout the underwriting process. Since such a situation would completely defeat the purpose of the VA loan program, the VA places a limit on the overall value that seller concessions can reach. Builders and sellers can still use these concessions as a competitive tool, but for VA borrower they cannot be used to the extreme that can put an unqualified veteran into a mortgage that they cannot afford.
The limit that the VA places on seller concessions is very reasonable. The combined value of all the seller concessions on the loan cannot exceed 4% of the reasonable value of the property. From the VA lender’s handbook: “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.” For example, if the home you are buying is valued at $200k, the builder or seller cannot offer you concessions that are worth more than $8,000. While that may seem like a small amount, you’d be surprised how far $8,000 can go towards seller concessions such as a temporary interest rate buydown or paying the VA funding fee. With the VA funding fee sitting at 2.15% for most borrowers, that leaves quite a bit of leeway for more concessions on the part of the seller should they wish to offer them.
This is also where the omission of paying for closing costs and normal discount points as part of seller concessions becomes really important. In the example above, $8,000 is in addition to how much the seller wanted to contribute towards the buyer’s closing costs or normal discount points. For example, right now ‘normal’ discount points could be considered two points on most mortgages. On a $200k home, those two discount points would probably be around $2,000 apiece, with closing costs for the borrower in the several-thousand dollar range as well. The seller could hit $13,000 in value to the buyer without breaking a sweat. Of course, this is just an enumeration of what the VA allows; what a seller is willing to offer is another story entirely. Find out what the seller or builder of a home is willing to offer in the way of concessions, and you might be able to get more money out of them than you originally thought, or than they originally offered. If you have any questions about seller concessions, feel free to contact us here at Low VA Rates.