Understanding Seller Concessions in Real Estate

When purchasing a home, you must account for closing costs and fees associated with securing a mortgage. These costs typically range from 3% to 6% of the home’s price. However, it’s possible to have the seller cover some of these expenses, known as seller concessions. These concessions can significantly reduce your out-of-pocket closing costs. It’s essential to understand how to leverage seller concessions effectively before finalizing your mortgage.

What are seller concessions?

Seller concessions are portions of the closing costs that the seller agrees to pay. This can either be specific fees or a percentage of the total closing costs. Understanding which costs can be covered by seller concessions can help you negotiate better deals.

Covered closing costs by seller concessions

Sellers might cover a variety of closing costs, including:

• Property Taxes: Pre-paid property taxes up to the end of the year at closing.
• Title Insurance: Protects you and your lender against claims on the home’s title.
• Loan Origination Fees: Charges by the lender for processing the loan.
• Inspection Fees: Costs for inspections required by the loan, such as pest inspections in certain states.
• Recording Fees: Fees for documenting the purchase with local government.
• Appraisal Fee: The cost for a licensed third-party to appraise the home’s market value.
• Attorney’s Fees: Costs for a real estate attorney to review closing documents, required in some states.
• Points: Upfront interest payments to lower the mortgage interest rate.

After applying for a loan, your lender provides a Loan Estimate detailing these costs. You can then collaborate with your real estate agent to determine which costs to request the seller to cover.

Who Benefits From Seller Concessions?

Seller concessions can be mutually beneficial. For sellers, offering concessions can make their property more appealing, particularly in a buyer’s market. Buyers benefit by reducing the cash needed at closing, which is especially helpful for first-time buyers who might underestimate the associated costs.

Pros and cons of seller concessions

Pros:

• Lower Upfront Costs: Seller concessions reduce the amount of money buyers need at closing, making home purchases more affordable.
• Quick Sale for Sellers: Sellers may expedite the sale process by agreeing to concessions, particularly if they are keen to sell quickly.

Con:

• Less Attractive Offers: Buyers requesting concessions might be seen as less appealing, especially in a competitive market.
• Potential Rejection: In a multiple-offer situation, sellers may favor offers without concession requests. Sometimes, making a lower offer and covering closing costs yourself can be more appealing to the seller.

Understanding seller concessions and how to utilize them can provide significant financial benefits when purchasing a home. Balancing the advantages and potential drawbacks is crucial in making informed decisions during your home buying process.

How to negotiate seller concessions

If you’re planning to ask for seller concessions to help with closing costs, successful negotiation is key. Here’s how to approach it:

Understand the market

Determining whether you’re in a buyer’s or seller’s market is crucial. In a buyer’s market, where homes linger longer on the market, sellers are more likely to agree to concessions. Conversely, in a seller’s market with high demand, you may find it harder to negotiate these terms.

Limit your requests

To enhance your negotiation power, streamline your demands. Sellers generally prefer straightforward offers. If you request concessions along with multiple repairs or replacements, your offer may seem too complicated. Prioritize what’s most important to you—if repairs are essential, you might consider making a lower offer and covering closing costs yourself.

Collaborate with a real estate agent

Engaging a real estate agent can significantly improve your negotiation strategy. Agents have the expertise to analyze local sales and market conditions. They can identify similar properties where sellers have agreed to concessions, strengthening your position. If the market is in the seller’s favor, your agent can help you decide whether to ask for closing costs or submit a lower offer.

Limits on seller concessions

Be aware that sellers can’t cover all your closing costs. The maximum contribution depends on your loan type and other factors. The seller’s contribution cannot exceed the total closing costs. For instance, if you’re purchasing a $200,000 home with a conventional loan and 20% down payment, your mortgage would be $160,000. With closing costs averaging 6%, the seller could contribute up to $9,600. However, if your actual closing costs are $5,000, the seller can only provide $5,000.

Reasons for limits on seller concessions

Restrictions on seller concessions are designed to prevent housing market inflation. Regulatory bodies like Fannie Mae and HUD enforce these limits to maintain market stability. Without these limits, inflated sales prices could mislead the market. For example, if a seller inflates a home’s price from $150,000 to $175,000 to cover $25,000 in closing costs, it artificially raises local housing prices. This practice can quickly escalate home and rent prices to unsustainable levels. By capping seller contributions, the market remains more stable and reflective of true home values.

By understanding these aspects and negotiating effectively, you can leverage seller concessions to make your home purchase more affordable.

Seller concession limits by loan type

The amount a seller can contribute towards closing costs, known as seller concessions, varies based on the type of loan. Typically, the lesser of the sale price or appraised value dictates the maximum concession amount. For instance, if you offer $155,000 for a home appraised at $150,000, with a 3% concession limit, the seller can contribute up to 3% of $150,000, or $4,500.

Here are the concession limits for different loan types:

Conventional Loans

• Down Payment Less Than 10%: Seller can contribute up to 3%.
• Down Payment 10% – 25%: Seller can contribute up to 6%.
• Down Payment More Than 25%: Seller can contribute up to 9%.
• Investment Property: Seller’s contribution is limited to 2%, regardless of the down payment.

FHA Loans

For Federal Housing Administration (FHA) loans, the seller can contribute up to 6% of the purchase price. These concessions can be applied to closing costs, appraisal fees, and other related expenses.

USDA Loans

For U.S. Department of Agriculture (USDA) loans, the seller can contribute up to 6% of the buyer’s loan amount. Unlike other loans, this is not based on the home price or appraised value. Note that some lenders do not offer USDA loans.

VA Loans

For Department of Veterans Affairs (VA) loans, sellers can contribute up to 4% of the purchase price. These concessions can cover payments towards the buyer’s judgments, debts, and VA funding fees.

FAQs about seller concessions

Can sellers refuse to contribute toward closing costs?

Yes, sellers are not obligated to contribute to your closing costs. Any concessions must be negotiated as part of the contract.

Are seller concessions paid out of pocket?

No, seller concessions come from the seller’s profit on the sale, not out of pocket.

Are seller concessions taxable?

Seller concessions are considered sales expenses and are tax-deductible.

Is it better to ask for seller concessions or a lower sales price?

This depends on your priorities. If reducing upfront costs is your goal, seller concessions are beneficial. If lowering the overall price is more important, consider negotiating a lower sales price instead.

Conclusion

Seller concessions can significantly reduce closing costs, making a home purchase more affordable for buyers and facilitating quicker sales for sellers. To determine if asking for concessions is advantageous, consult with your real estate agent. They can help you navigate the market and ensure that any concessions you request comply with the limits set by your loan type.