What Are Seller Concessions and How Do They Work?

The initial expense of buying a home requires more than just a down payment. You’ll also need to cover closing costs, such as the loan origination fee and home appraisal fees. Since closing costs typically range from 2% to 5% of the home's purchase price, these expenses can really add up. But in some cases, you may be able to get the seller to cover them.

It's called a seller concession, and it can help you save a lot of money upfront on your home. Find out how you can use seller concessions to lower your upfront costs, leaving more money to devote to your mortgage, homeowners insurance, property taxes, and other long-term expenses.

What are seller concessions?

Seller concessions are costs the seller agrees to pay on your behalf to help reduce some of your upfront costs when buying a home. These concessions can cover eligible closing costs, mortgage points (also called discount points), and even prepaid property taxes and homeowners insurance premiums. However, seller concessions generally cannot be used to directly pay for your down payment — that remains your responsibility. You could choose to apply some of the money freed up in your budget to the down payment, independently of the concessions agreement.

Seller concessions are negotiated as part of the home’s purchase agreement. Sellers might agree to pay only specific closing costs, a flat amount, or a percentage of the home price. In a slower housing market, you can ask for these concessions in your initial offer, and the seller may agree to them simply to sell their house faster.

You may also request seller concessions to help cover necessary repairs if there are some concerns on the home inspection report. Find out more about how to negotiate after a home inspection.

Here are some of the closing costs and related fees that may be covered by seller concessions:

• Appraisal fee
• Origination fee
• Document preparation fee
• Escrow fee
• Title insurance and fee
• Recording fee
• Survey fee
• Prepaids, including property taxes and homeowners insurance
• Mortgage points (for rate buy downs)

In some cases, the seller might agree to concessions without raising the purchase price of the home. However, if the seller has a little more negotiation power (in a more competitive market, for example), the seller might agree to concessions only if you agree to a higher purchase price.

This type of arrangement enables you to effectively finance these costs over time and can free up cash to use toward the down payment or other closing costs. But if you agree to a higher purchase price, know that the appraisal needs to meet the higher price, your down payment could increase (or your initial equity could decrease), and your monthly payment could increase (marginally) as well.

Seller concession limits by loan type

Government-sponsored agencies and financial institutions set rules for how much a seller can offer you at closing as part of the seller concessions, and the amount depends on the type of mortgage you’re using and (for conventional loans) your down payment.

These limits are intended to promote stability in the housing market, prevent overinflated home prices, help buyers avoid purchasing more house than they can afford, and reduce risk for lenders. 

Conventional loan

Conventional loans, most of which are backed by Fannie Mae or Freddie Mac, typically allow seller concessions between 3% and 9% of the purchase price, depending on the loan-to-value ratio (LTV for short, meaning your mortgage amount divided by the home's value), and the type of property. For primary residences and second homes, the concession limits by LTV are:

If you’re purchasing the home as an investment property, seller concessions are capped at 2%, regardless of the LTV.

FHA loan

The Federal Housing Administration caps seller concessions at 6% of the purchase price for FHA loans. FHA loans have less strict credit requirements and allow smaller down payments, which makes them popular with homebuyers who might have trouble qualifying for conventional loans or would prefer to put less money down.

VA loan

The VA caps seller concessions at 4% of the established reasonable value of the property, rather than the purchase price. However, the cap applies only to certain costs, such as the VA funding fee and prepaid property taxes. The cap does not apply to standard seller-paid closing costs and discount points.

Active duty service members, veterans, and surviving spouses may be eligible for VA loans through the Department of Veterans Affairs. These loans typically don’t require a down payment and also allow seller concessions.

USDA loan

As with FHA loans, USDA loans generally cap seller concessions at 6% of the purchase price.

USDA loans backed by the U.S. Department of Agriculture can be used to buy homes in eligible areas, mostly rural. These loans typically offer lower rates and more lenient credit requirements to make home ownership more accessible for low- and moderate-income buyers.

When should you ask for seller concessions?

In the literal sense, the time you should ask for concessions is in your initial offer or in a counteroffer. However, the more important point is figuring out the situations when it makes sense to ask for them.

Here are a few scenarios when you should consider asking for seller concessions:

When the seller is motivated

Some sellers need to move ASAP — maybe for a job, or school, or to be with a loved one. In that case, you have the upper hand as the buyer, unless the seller’s already fielding other offers.

When the house isn’t selling

Whether it’s a slow market or a specific house that just can’t attract a buyer, you have more leverage when a home has been on the market for a while, especially if previous sales have fallen through. Your real estate agent can help you assess whether a house has been listed long enough that the seller might be open to some concessions.

After the inspection uncovers needed repairs

If the inspection comes back with major issues, such as extensive plumbing or electrical work, pests, or a roof in need of replacement, you can use it to negotiate with the seller. They may be willing to lower the purchase price, or they might offer seller concessions to cover the cost of the repairs (or handle the repairs before closing).

If it’s obvious the house needs work when you first tour it, you don’t necessarily need to wait until an inspection. You can ask for concessions in your initial offer.

To limit out-of-pocket expenses

If you’ve been saving for years and finally have enough money to make a down payment, you might not want to wait longer to save the money for closing costs. Or, you might simply prefer to keep cash on hand for interior or exterior updates or unexpected repairs. This strategy can be especially prudent if you might otherwise need to borrow to cover future expenses.

When mortgage rates are high

Sellers know that today’s mortgage rates are keeping many buyers from making offers. In an effort to sell their homes more easily, sellers may be willing to offer concessions that cover the cost of mortgage points, which allow you to “buy down” your rate, either temporarily or for the life of the loan.

How do you negotiate seller concessions?

When you’re making a purchase as big as your home, negotiating everything from the price to the repairs to the seller concessions is crucial. If you're not sure how to ask for seller concessions, here are some tips on how to negotiate closing costs:

1. Work with an experienced real estate agent

First and foremost, hire an experienced real estate agent who knows your market and has worked with seller concessions before. A good real estate agent can advise you through the steps below.

2. Determine if you have the right leverage for the request

Talk with your real estate agent to better understand the state of the market. In a competitive market with bidding wars, all-cash offers, and houses that get offers the same day they’re listed, there’s little room for negotiation. 

But if the market is slower, or a particular home has been sitting for a while (or even under contract once or twice before), you may have a lot more leverage.

“While you can be an eternal optimist and ask for seller concessions for any home on its first day on the market, you’re more likely to see success if you look for homes that have been on the market longer than two or three weeks,” says Philippa Main, Realtor at Samson Properties in northern Virginia. “A new home listing gets its most activity during the first two weeks on the market, and if it’s not sold by then, there’s more opportunity to negotiate.”

3. Calculate how much you’ll ask for

Your real estate agent can help you understand the closing costs you’ll pay for a home. Review these against your budget and determine which ones you want to request the seller to cover. You can certainly ask the seller to cover all the closing costs, but the more you ask for, the less attractive your offer becomes.

And remember, there are caps on how much you can get as a seller concession, depending on factors including the type of loan and the loan-to-value ratio.

“Some people don't realize that their loan type won’t allow them to go above a certain amount when requesting seller concessions. So a good tip when negotiating is never ask for more than you can actually collect,” says Main.

“Also, I like to look at the market statistics for a neighborhood and see what percent less homes sell for if they’re on the market longer than 30, 60, 90 days and ask for that percentage in a price reduction or credit,” she says.

4. Offer an incentive to the seller

If you don’t hold the upper hand in negotiations, you may need to offer something in return. For instance, if you’re asking for a $5,000 seller concession to cover out-of-pocket expenses at closing, you can make an offer that is $5,000 over asking.

For the seller, this essentially means they get what they were asking for, but it allows you to pay off the closing costs over time as part of your mortgage, rather than at closing.

There are other incentives you can offer beyond raising your offer, says Alexei Morgado, founder and CEO of Lexawise. “This could be anything from a smooth closing timeline, good preapproval, flexible closing dates, a greater escrow deposit, or fewer, smaller repair requests,” he advises.

5. Be prepared to walk away

Ultimately, asking for seller concessions doesn’t mean you’ll get them. If the seller counters with a smaller concession or simply declines the request, you’ll have to decide if you still want to move forward or if you want to pass on the house.

Pros and cons of seller concessions

From the buyer's perspective, seller concessions can offer several benefits, but there are drawbacks to consider, too.

Details on the pros

• Lower upfront costs: Seller concessions can be a game-changer, potentially enabling you to purchase a home sooner, keep cash on hand for repairs or improvements after the sale, or pay moving costs and other expenses.
• Potential rate buydown: If instead of closing costs, the seller pays to reduce the rate on your mortgage, it could mean lower payments for years. 
• More purchasing power: More money toward a down payment means you could lower your monthly mortgage payments or potentially afford a higher-priced home.
• Avoid PMI: If seller concessions can free up enough funds to bump your down payment to 20% or more, you could avoid paying private mortgage insurance. 

Details on the cons

• Less attractive offer: Making an offer with a request for seller concessions makes your offer less appealing to the seller. If they receive a similar offer without a request for concessions, they’ll likely go with that one.
• Potential to lose the home: If your offer was accepted but you ask for seller concessions following the home inspection, the seller doesn’t have to agree to them. If you can’t reach an agreement, the sale could fall through.
• Seller could increase purchase price: In some scenarios, sellers may agree to concessions, but only if they can increase the purchase price. That likely means a higher monthly mortgage payment and higher interest costs over the life of the loan.