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Homebuyers are sometimes caught off guard by how much money they need to bring to closing. In addition to the down payment, you’ll need to pay a long list of closing costs — including an origination fee, title insurance, and more — before you can receive those house keys.
Seller concessions, also referred to as seller assist, make these expenses less burdensome for you.
Here’s what you need to know about seller concessions:
- What are seller concessions?
- Limits to seller concessions
- Pros and cons of seller concessions
- How to negotiate seller concessions
What are seller concessions?
Seller concessions are when a seller agrees to pay some or all of the buyer’s closing costs.
However, “payment” is somewhat of a misnomer for how this arrangement works. The seller isn’t really paying anything — they simply allow the closing costs to be rolled into the mortgage and increase the sales price to make up the difference.
Closing costs are what you’ll pay to finalize the home loan and sale. They include:
- Origination fee
- Mortgage points
- Title insurance
- Property taxes
- Transfer tax
- Appraisal fees
- Escrow fees
- Inspection fees
- Recording fees
- Survey fees
Together, closing costs generally total 2% to 5% of the loan amount. That means a $250,000 mortgage will typically cost you anywhere between $5,000 to $12,5000 in closing costs.
The primary reason sellers normally agree to offer concessions is to sell the house faster.
Learn More: How Much Does It Cost to Buy a Home?
How seller concessions work
Say you want to buy a $300,000 home. You plan to put $50,000 down and take out a mortgage for the remaining $250,000.
However, you’re worried about whether you can come up with enough cash to cover your closing costs, so you ask the seller for a 5% concession — equal to $12,500. The seller agrees to the concession and you roll it into your mortgage.
To make up the difference and gross the full $300,000, the seller will likely increase the sales price by $12,500 — in this case, from $300,000 to $312,500.
You would then need to increase your loan amount from $250,000 to $262,500. In the end, you’re essentially financing the concession over the life of the loan.
Closing costs that a seller can help cover
Lenders limit items eligible for concession to what Fannie Mae terms financing concessions. Items such as repair costs are ineligible for concessions.
Here are a few closing costs that a seller can help cover:
|Origination fee||Usually 1% of loan amount|
|Mortgage points||Each point equals 1% of loan amount|
|Application fee||$350 on average|
|Credit report fee||$30 to $50|
|Title insurance fee||$1,000 on average, but cost varies depending on state and price of home|
|Homeowners insurance||Varies depending on location and coverage amount|
|Appraisal fee||$300 to $500, but can cost more depending on size and location of home|
|Home inspection fee||$280 to $400, but can cost more depending on size and location of home|
Credible’s streamlined process can help you find your next home loan. You can easily compare closing cost details on every loan and generate a streamlined pre-approval letter without leaving our platform. Checking interest rates with us is free and won’t affect your credit score.
Limits to seller concessions
To help ensure that buyers don’t borrow more than they can afford, the investors that back mortgage loans impose seller concession limits as part of their underwriting standards. These limits vary by loan type.
Conventional loans are backed by Fannie Mae or Freddie Mac rather than the federal government.
Here are the concession limits according to Fannie Mae:
- Concession limits for conventional loans range from 3% to 9% of the purchase price for primary and second homes, depending on the loan-to-value ratio.
- For investment properties, the concession limit is 2%.
FHA seller concessions work similarly to conventional loans. Concessions are limited to 6% of the sales price or appraised value, whichever is less.
VA loans are guaranteed by the U.S. Department of Veterans Affairs and offer competitive interest rates for eligible military members, veterans, and spouses. No down payment is required with a VA loan.
Some important seller concession guidelines to note for VA loans include:
- The concession limit for VA loans is 4%.
- Sellers must pay real estate commission, brokerage fees, and a fee for the termite report required for VA purchase loans
- You can negotiate with the seller to determine who will pay other closing costs, including the VA funding fee and origination fee.
Pros and cons of seller concessions
Seller concessions can be highly beneficial for some homebuyers, but their downsides can work against you if you’re not careful.
- They can help preserve your cash reserves.
- They might make a larger down payment possible.
- They can help you buy a home you might not be able to afford otherwise.
- You’ll pay interest on the closing costs over the entire life of your loan.
- They can jeopardize conventional financing if the resulting purchase price exceeds the home’s appraised value.
- They can reduce your negotiating power on other aspects of your sale, such as repairs.
- They increase your LTV, so you start out with less equity in your home than you’d have.
How to negotiate seller concessions
Although it’s possible to negotiate concessions in any market, the right circumstances increase your chance of success. Here are some effective strategies to use during negotiations:
1. Determine the state of the market
Sellers are more likely to agree to concessions in a buyer’s market, where there are too many homes available relative to the number of buyers looking to purchase. In this case, concessions can help the seller get their home sold faster.
In a seller’s market, where more buyers are competing for too-few homes, you’ll have to make a stronger offer — such as waiving loan contingencies — to offset the concession request.
2. Decide which concessions to ask for
Concessions aren’t an all-or-nothing thing. You’re more likely to get concessions if you ask for the concessions you need versus all the concessions you want.
3. Give something in return
When you ask a seller for concessions, you essentially ask them to subsidize your home purchase. You might need to offer something in return, such as a full-price (or higher) offer or forgoing repairs as long as the condition doesn’t jeopardize your financing.
4. Consider working with a real estate agent
Working with a real estate agent who knows your market and the trends that affect it can help you negotiate your offer. And once you’re under contract, your agent will work in your best interest to overcome any glitches that pop up and keep the transaction on track.
Keep Reading: No-Closing-Cost Mortgage: Is It Actually Worth It?