Carey Ann Cyr
Area Sales Manager | NMLS #160055
Branch NMLS #1093019
Posted On May 14, 2019
It’s no secret that the down payment is the biggest obstacle would-be home buyers face. Saving for a down payment has become increasingly difficult as home prices rise, rents go up, and student loan debt reaches record highs. While it may not be surprising that home buyers are using down payment assistance, it may be surprising that some of that assistance is coming from home sellers themselves.
According to Freddie Mac, in 2016, 70% of home buyers used savings, inheritance, a retirement account, or other assets to cover their down payment. 31% used the proceeds from the sale of another property, 23% used a gift or loan from a friend or family member, 16% used a seller contribution, 10% used assistance from a nonprofit or government agency, and 4% used a second lien, home equity loan, or HELOC (The figures stated do not equal 100% because survey respondents were allowed to select more than one option). Seller contributions may seem surprising, because unlike another commodity, the seller typically does not need to offer the buyer an incentive to return to them to make another purchase.
In some scenarios, seller contributions can benefit a seller who is on a timeline to sell their home. Negotiating with a buyer who is ready could be faster than waiting for another buyer to make an offer. For example, if a home is an older property in need of repair, buyers have a few options. They can either ask the seller to complete the repairs, tacking on that extra transaction time and possibly even jeopardizing the quality of the work if the seller hires someone to complete the repairs quickly. They can ask for a lower price on the home, which would reduce the monthly payment over time but not necessarily cover immediate repairs. The third option the buyer has is to ask the seller to help cover the repairs in the form of a credit to be paid at closing. This credit, whether it goes toward the closing costs or down payment, allows the buyer to allocate some funds to pay for the repairs right away without adding extra transaction time.
The practice of sellers subsidizing the down payment may remind some of irresponsible practices during the Financial Crisis. However, the practice today is much different than what was taking place in the early 2000s. Government agencies have set guidelines that put a cap on how much a seller is allowed to contribute. Underwriters also distinguish between a “seller concession” or a credit offered at closing that may increase the cost of the home, and a “seller contribution” or the amount deducted from the sales price of the home.
If you are interested in buying a home, but need help with the down payment, it’s a good idea to start with meeting with a lender. I can help you determine what course of action is best for your situation, whether it’s a down payment assistance program or negotiating with the seller. In most cases, buying a home is a better investment than long-term renting. The only thing you have to do is overcome the down payment hurdle.