Juicy Estates: Mortgage Blog

Sellers Contributions In South Florida Made Easy

Being a full time South Florida mortgage banker I sometimes forget that not everyone lives in the numbers world everyday so this post is for all of you that have found sellers contributions to be a confusing issue.  In this post I will attempt to explain sellers contributions in plain English since they are such an effective and useful negotiating tool in the current real estate environment.

I think the first issue we should clear up is that they are “sellers contributions” not “sellers concessions”.  A sellers concession would be a reduction in purchase price while a sellers contribution is a contribution to help the buyer cover closing costs and/or prepaid amounts.

So now that we have that cleared up let’s take a look at how a sellers contribution is typically structured.  In most instances the contribution will be expressed as a percentage of the purchase price.  For example a 3% sellers contribution with a $1,000,000 contract price would be $30,000 (.03 x $1,000,000= $30,000).

Conversely the sellers contribution can be expressed as a specific dollar amount instead.  For example a $1,000,000 contract price with a sellers contribution of $40,0000…or any other dollar amount within allowable limits.

The maximum amount of the allowable sellers contribution will be limited by the type of financing the  buyer is obtaining and the amount of down payment they are making.  Each situation is different so you should consult your mortgage banker however, the standard guidelines are as follows:

Conforming loans (below $417,000)

• with a <10% payment are limited to a 3% (or equivalent dollar amount) contribution.
• with a >10% < 25% down payment are limited to a 6% (or equivilant dollar amount) contribution.
• with a >25% down payment are limited to a 9% (or equivalent dollar amount) contribution. 

Non-Conforming loans “Jumbo Loans” (over $417,000)

• with a 20% down payment are limited to a 6% (or equivalent dollar amount) contribution
• with a >25% down payment are limited to a 6% (or equivalent dollar amount) contribution

While you should consult your Realtor the verbiage used to express a contribution within the contract might be something like “the seller agrees to contribute 5% (or which ever amount you desire) of the purchase price towards the buyers closing cost and prepaid amounts”  It is as simple as that.

The Benefit To The Seller:

In the current real estate environment many sellers are open to making sellers contributions as it helps buyers purchase their home with less out of pocket expense thus expanding the pool of potential buyers for their home and making the home more attractive option than competing listings.  Additionally the sellers realizes less of a capital gain (assuming there is a gain) since the net proceeds of the sale are reduced by the amount of the contribution *please consult your CPA for specific advise on this issue.

The Benefit To The Buyer:

The most obvious benefit is that the buyer will have less out of pocket expense since a some or all of their closing cost and prepaid amounts will be paid by the seller.  This frees up the buyers cash to either make a larger down payment or just keep the additional monies in reserve for a rainy day.  Other less tangible benefits are the ability to qualify for a more expensive home and potential tax benefits as well.  **bonus info…discount points paid by the seller may be tax deductible by the buyer in the year that they are paid….consult your CPA**

As always if you are buying or selling a home in Coral Gables, Pinecrest, Gables Estates or any of South Florida’s premier neighborhoods feel free to call or write with any questions you may have.

This entry was posted on Sunday, December 21st, 2008 at 10:27 pm and is filed under Home, Mortgage News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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