Cover story: Buyers bite on seller financial incentives

The goal of home sellers is to make money, either so they can purchase another home or invest their profits in other ways, but sometimes, especially in a buyer’s market like this one, you have to spend money to make money. As home sellers search for ways to make their home enticing, they start by cleaning and decluttering and then establishing what they hope will be a fair price. After these steps, sellers can look into creative financial incentives that may bring in buyers.

“The current credit crunch means that buyers are having a harder time qualifying for a loan,” says Jason Klein, president of City Line Mortgage LLC in Bethesda. “Most lenders are leaning toward requiring 10 to 20 percent down payments, with a few loans allowing 5 percent down.”

Buyers in a cash crunch will be more likely to choose a home when the seller is offering financial incentives such as closing-cost assistance. However, lenders do set limits to how much a seller can provide for their purchasers.

“Specific loan programs have specific guidelines for what sellers can offer,” Mr. Klein says. “Typically, seller concessions are limited to 2 to 3 percent of the purchase price. In this market, that can be a powerful tool. Basically, a 3 percent concession covers all closing costs, so the purchasers can keep all their cash for a down payment. The higher the down payment, the more likely it is that the buyers will qualify for a loan.”

Barbara Sheehan, assistant vice president of mortgage products for Navy Federal Credit Union in Vienna, says that seller concessions vary, along with the purchaser’s down payment in addition to the loan program.

“Generally, the higher the down payment, the higher the allowed seller concession, anywhere from 3 to 6 percent of the purchase price,” Ms. Sheehan says. “But if the purchasers are putting no money down, the seller concession must be smaller.”

Ms. Sheehan says that some 95 percent loans are still available and that VA financing can be obtained with as little as a 4 percent down payment, but lenders do set limits on how much sellers can provide based on the loan product.

While sellers sometimes want to throw in a car as an incentive to purchase their home, Ms. Sheehan says these items should be listed on a separate bill of sale.

“If something like a car or a boat is listed in the contract as part of the property, then the lender will either ask the contract to be rewritten or will reduce the loan-to-value based on that much of the sale price,” Ms. Sheehan says.

Ms. Sheehan says that standard lending rules are written so the home buyers put some of their own money into the purchase rather than relying on gifts and financial incentives from other people.

“Generally, borrowers have to have some skin in the game,” she says. “At least 5 percent of the value of the home should come from the buyers directly. If the buyers don’t have any skin in the game and property values decline, it is just too easy to walk away from the house.”

Patricia Marshall, a senior loan officer with Bank of America in Columbia, recommends that sellers look into seller-funded gift opportunities.

“While sellers cannot give a down payment gift directly to buyers, they often don’t realize that there are programs available that allow them to provide down-payment assistance through a third party,” Mrs. Marshall says.

The Nehemiah Program (www.nehemiahcorp.org or www.getdownpayment.com) provides gift funds for qualified home buyers that can be used for closing costs and down payments.

Gift funds up to 6 percent of the sales price are available for buyers who qualify for an eligible conventional loan or FHA loan. Loan limits for FHA loans in the Washington area have been raised to $729,750, allowing more buyers to obtain financing for homes with this type of loan.

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