Seller assist is a very helpful financial mechanism to enable buyers to purchase a home with less upfront cash, but a difficult concept for many to understand. In fact, I am sure that there are many buyers who have utilized seller assist but never understood how it works. They just saw a cost sheet that showed them less cash required to make the purchase and decided, “Let’s do this one.”
What is seller assist?
One reason seller assist is confusing is that it is misnamed. It should be called “funds borrowed by buyer for closing costs” because that’s what it is. Here’s how it works. You and the seller agree that you will pay $100,000 for the seller’s property. You are short the cash necessary to complete the purchase by $3,000. So your agent writes up the sales agreement for $103,000 with $3,000 of seller assist. The seller, perhaps with the help of the seller’s agent, understands that the “effective price” is $100,000. At closing, the seller gets $100,000 for the property and the additional $3,000 of the contract price is applied to your closing costs. Your mortgage is based on the contract price of $103,000, so you are actually borrowing an additional $3,000. You will pay it back to your bank with interest just like the rest of your mortgage. Due to the accounting method in which it shows up on the final ledger as included in the sale price and then $3,000 is taken as a debit from the seller and given as a credit to the buyer, it is dubbed “seller assist”, making it sound like a gift from the seller which it is not.
What are the limits of seller assist?
Lenders impose limits on the amount of seller assist. At the time of this writing, conventional loans allow a maximum of 3% with a down payment of less than 10%. With 10% or more down conventional loans allow up to 6% seller assist. FHA loans allow 6% seller assist even with the current minimum 3.5% down. These limits are subject to change so you must always check with your lender to verify the current amount of seller assist allowed for your particular loan.
What is the cost of seller assist to the seller?
The seller does not pay anything for a buyer’s seller assist. The seller’s agent will show the seller a cost sheet that indicates the amount of seller assist as a deduction from the (adjusted) sale price resulting in the effective sale price the seller will receive. Nonetheless, some sellers do not like seller assist. It is not uncommon for a seller who receives an offer which includes seller assist to tell his agent, “I don’t understand this seller assist business but I know I don’t like it! No one helped me pay for my closing cost when I bought this house.” Can’t blame them too much, it is called “seller” assist after all.
Once the smoke clears and calm understanding prevails, there are true downsides to seller assist from the seller’s perspective. First of all, it implies that the buyer’s financial situation is marginal. Especially since seller assist is usually accompanied by the minimum down payment. In fact, if the buyer had more cash to apply to the deal, the risk of the buyer failing to secure final approval for financing would be lower. The seller in this case carries a higher risk of the deal falling through. The other very real risk for the seller is that the property may not appraise for the contract price. Remember, the price in the sales agreement includes the seller assist on top of the effective sale price and the mortgage amount is based on the contract price, not the effective price. So the bank will require that the property appraise for at least the contract price. If it does not, the buyer is protected by a mortgage contingency and thus can walk away and get her hand money back. The seller is left to put the house back on the market and start over again, now with the black eye on the listing that it was under agreement and returned to the market. Of course, the seller can sell the property to the buyer at the appraised value or negotiate with the buyer to split the difference between the appraised value and the contract price. The buyer would have to come up with additional cash for the amount over the appraised value that he has now agreed to pay, which he may not have since he asked for seller assist at the outset for lack of cash. In a very real sense, if the appraisal is considered spot on accurate on the value of the home, the seller is guaranteeing the buyer that she is getting the property for less than market value, by the amount of the seller assist. The seller does not pay for the seller assist, but that does not mean there is no cost to the seller.
Who should use seller assist?
The short answer is anyone who simply cannot avoid it. As mentioned above, sellers will frown on seller assist so a buyer loses some negotiation leverage by using it. An offer without seller assist is always stronger than one with. If a seller is fortunate enough to get two offers at the same time, both the same except one has seller assist and the other does not, the seller will always choose the offer without seller assist. However, often a buyer has good income and excellent credit but just does not have very much cash. This happens a lot with young professionals recently out of college. It is also very common in general in the United States where we have a very difficult time saving money. There are so many wonderful things out there to buy—and most of them are on sale this week! In general, it would be better to not have to use seller assist, but sometimes there are adequate reasons to buy now that makes it worth the downside. On the other hand, a buyer is well advised to be sure that seller assist is not just a means to jump in over one’s head. If income and credit are also marginal, this might not be the time to buy a house.
There is a special case where seller assist can be used to good benefit aside from when a buyer is just short on cash. In this case, seller assist is used to avoid paying monthly private mortgage insurance. PMI is generally charged when a buyer has less than 20% down. If a buyer’s down payment is within 6% of 20% down, bumping up the sale price and taking seller assist to get to a 20% down payment will eliminate the need for the monthly mortgage insurance. Here the buyer will not suffer from the seller’s perception of him as marginally qualified, but the seller’s concern about the property appraising for the contract price including the seller assist is still valid.
Seller assist is a sharp tool which should not be used unless necessary. It should not be employed to over leverage a purchase leaving the buyer at risk of default and foreclosure. Used appropriately, seller assist, although wrongly named, can be a very helpful instrument for both buyer and seller in putting together a mutually beneficial transaction.