The Complete Guide to Fannie Mae Financing Concessions

Buying a home is one of the most significant investments most people make. For many, navigating the costs associated with closing can feel overwhelming. Enter Fannie Mae financing concessions—a practical way for buyers to reduce their upfront costs and for sellers to make their property more attractive in the market.

In this guide, we’ll explore everything you need to know about financing concessions, including what they cover, their limits, and how they benefit both buyers and sellers. By the end, you’ll have a clear understanding of how to use these concessions to your advantage.

What Are Fannie Mae Financing Concessions?

Financing concessions refer to costs typically paid by the buyer during the home-buying process but are instead covered by the seller. These concessions are a win-win in many real estate transactions, helping buyers reduce their initial expenses while giving sellers an edge in competitive markets.

However, it’s essential to understand what qualifies as a financing concession under Fannie Mae guidelines to ensure compliance and avoid issues during the loan approval process.

What Can Sellers Pay for as Financing Concessions?

Sellers can cover a range of costs associated with the mortgage and closing process. Here are the most common types:

1. Origination Fees

These fees are part of creating a mortgage loan and may include processing, underwriting, and application costs. When the seller pays them, they’re considered a financing concession.

2. Discount Points

Buyers often pay discount points upfront to secure a lower mortgage interest rate. If the seller covers these points, they count as a concession.

3. Commitment Fees

Lenders charge these fees to lock in a specific interest rate for the loan term. A seller paying this fee on behalf of the buyer qualifies as a concession.

4. Appraisal Fees

Appraisals are essential to determine the value of the property, and buyers usually bear this cost. If the seller pays, it’s categorized as a financing concession.

5. Miscellaneous Fees

Other costs that sellers can cover include:

• Survey charges
• Title insurance premiums
• Real estate tax service fees

By taking on these expenses, sellers can significantly reduce the financial burden on buyers.

Prepaid Items as Financing Concessions

Prepaid items, which cover future costs beyond the closing date, can also be included in financing concessions. Examples include:

• Interest Charges: Limited to no more than 30 days.
• Real Estate Taxes: For periods after the closing date.
• Hazard Insurance Premiums: Restricted to 14 months.
• Homeowners Association (HOA) Dues: Covers transfer fees and other related costs.
• Mortgage Insurance Premiums: Includes escrow funds for renewal.

These items may seem small individually, but they can add up. Having the seller cover them can make a meaningful difference in reducing the buyer’s upfront expenses.

Understanding Fannie Mae’s Contribution Limits

Fannie Mae places strict limits on how much sellers can contribute toward financing concessions, based on the loan-to-value (LTV) ratio. The LTV ratio is the percentage of the home’s value financed by the loan.

Here’s a breakdown of the limits:

• LTV Greater than 90%: Seller can contribute up to 3% of the purchase price.
• LTV Between 75% and 90%: Seller can contribute up to 6% of the purchase price.
• LTV Less than 75%: Seller can contribute up to 9% of the purchase price.

For investment properties, the limit is lower—2% of the purchase price—regardless of the down payment size.

Why Do These Limits Matter?

If seller contributions exceed these limits, the excess amount is treated as a sales concession rather than a financing concession. This distinction can affect the home’s appraised value and the buyer’s loan approval.

Benefits of Financing Concessions

Financing concessions offer advantages for both buyers and sellers, making them a valuable tool in real estate transactions.

For Buyers

• Lower Out-of-Pocket Costs: Buyers can save thousands by having the seller cover certain closing expenses.
• Improved Affordability: This is particularly helpful for first-time buyers or those with limited funds for a down payment.
• Financial Flexibility: Savings can be redirected to other priorities like moving expenses, furniture, or an emergency fund.

For Sellers

• Increased Buyer Appeal: Offering to cover closing costs can make a property more attractive, especially in a competitive or buyer’s market.
• Faster Transactions: By easing the financial burden on buyers, sellers can facilitate a quicker sale.

Financing Concessions vs. Sales Concessions

It’s important to distinguish between financing concessions and sales concessions. While financing concessions reduce the buyer’s closing costs, sales concessions (e.g., including furniture or other perks) may not directly align with Fannie Mae guidelines and could affect the property’s appraised value.

Understanding the difference ensures the transaction remains compliant with lending rules and protects the integrity of the loan.

Frequently Asked Questions About Financing Concessions

1. Are Attorney Fees and Transfer Taxes Financing Concessions?

No, local customs often dictate that sellers pay these fees, but they are not categorized as financing concessions under Fannie Mae guidelines.

2. Can Sellers Cover All Buyer Costs?

No, sellers must stay within Fannie Mae’s contribution limits based on the LTV ratio. Exceeding these limits can lead to complications with loan approval.

3. How Do Concessions Affect Buyers with Low Down Payments?

Financing concessions are particularly beneficial for buyers making smaller down payments, as they help offset the higher costs associated with higher LTV ratios.

Key Tips for Buyers and Sellers

• Stay Within the Limits: Ensure seller contributions comply with Fannie Mae guidelines to avoid reclassification or loan issues.
• Communicate Clearly: Buyers and sellers should openly discuss which costs will be covered and confirm them in the purchase agreement.
• Consult a Professional: If you’re unsure about the rules, work with a real estate or mortgage expert to avoid surprises during closing.

The Bottom Line

Fannie Mae financing concessions are a powerful tool for reducing upfront costs for buyers and creating attractive incentives for sellers. By understanding what they cover and adhering to Fannie Mae’s limits, both parties can ensure a smooth and successful transaction.

Need Personalized Help?

If you’re buying or selling a home and want to explore financing concessions further, our team is here to guide you every step of the way. Schedule a one-on-one consultation today to get expert advice tailored to your unique situation. Simply click the link below to get started!