With many costs involved when buying a home, anything you can do to lower the expense when your finances are already stretched will be appealing. You need to find the money for a down payment and closing costs, as well as cover the cost of moving home and more.
You could reduce these costs with seller concessions. The purchase contract can include a seller concession where they will pay some or all of the closing costs.
If you are near the limit of your savings, a concession from the seller can make buying the home more manageable. The concession could be significant depending on the mortgage program you’re using.
But what are seller concessions, and how much can you get when buying your home?
What is a seller concession?
Understanding how a seller concession works in real estate is essential.
Seller concessions are when the homeowner agrees to cover at least some of the closing costs the buyer has to pay. However, this doesn’t mean the seller will pay the buyer for the upfront costs involved during the transaction.
This arrangement lets the seller pay some of the buyer’s costs from the money they receive from the sale. This means that the buyer does not need to worry about finding the money to pay these expenses, and it also does not mean the seller needs to write a check for the buyer.
How do seller concessions work?
Concessions often work as an incentive for a buyer so that it is easier for them to buy the home. A seller might offer a concession if they want to find a buyer faster, which is more likely when fewer buyers are around.
Buyers can ask for a concession if they don’t have the funds to cover the closing costs and still have the down payment they need to buy the home.
Sellers can agree to a concession while raising the sale price, so they don’t lose out. The price increase can then be used for the buyer’s closing costs. When this happens, the buyer essentially finances their closing costs as part of their mortgage.
The concession can cover up to the entire closing costs but not more. Concessions cannot be used to get cash back on the purchase or to fund any other part of the transaction. It can’t be used to increase the down payment, pay moving-in costs, or pay for repairs.
What do seller concessions pay for?
The exact things that are included depend on the loan type being used, but they generally include the following:
- Appraisal fees
- Loan origination fees
- Mortgage discount points
- Title insurance
- Property taxes
- Home inspection fees
What is the maximum seller concession for mortgage programs?
Depending on the type of loan you are using to buy the home, there will be certain max seller concessions allowable. With government-backed loans, the down payment amount doesn’t matter, but they have the following max seller concessions:
- FHA – 3%
- VA – 4% (not all closing costs are included, so concessions can be higher)
- USDA – 6% (based on the loan amount, not the sale price)
With a conventional loan, the max concession is 3% with an up to 10% down payment. If you put down 10% to 25%, a 6% concession is allowed. With over 25% down, you could have a concession of 9%.
Bearing these figures in mind, other rules could also limit the concessions you ask for:
- The seller’s concession cannot be more than the closing costs.
- When the concession is included, the sales price must be aligned with the appraisal.
Should you use seller concessions?
Using seller concessions is an excellent way to make sure your down payment is as large as possible. With a larger down payment, you could avoid paying mortgage insurance and benefit from better interest rates.
These concessions mean you will have a larger loan than negotiating a lower price with the seller. A concession often means you are financing your closing costs with more interest to pay on your mortgage.
A seller might not look at your offer as favorably when you are asking for a concession, which might mean you miss out on a home in a competitive market. Concessions are more prevalent in buyers’ markets, where sellers are more likely to be motivated to agree to this arrangement.
A seller concession is worthwhile if you struggle to cover closing costs and still have a reasonable down payment. Seller’s concessions will become more prevalent when the real estate market favors home buyers.
Bill Gassett is a nationally recognized real estate leader who has been helping people buy and sell MetroWest Massachusetts real estate for the past 35 years.