Everything You Need to Know About Seller’s Concessions
Have you heard a real estate agent using the term “seller’s concessions” and wondered what it meant?
Buying a home can stretch your finances to the limit, with closing costs that could be as much as 5% of the purchase price. This can make purchasing the home you want very difficult, but there is a possible way to have the seller help you with these closing costs.
If the situation is right, sometimes the seller might be willing to help with these costs. These are known as seller concessions, and they could save you thousands when buying your new home.
A seller’s concession is also sometimes called a seller assist. In this scenario, the seller pays some or all of the buyer’s closing costs.
The amount the seller can contribute to closing costs will vary depending on the type of loan a buyer is using. If paying your closing costs is a concern, perhaps a seller concession could make buying your home easier.
Let’s take a comprehensive look at what seller concessions are and how you can use them to make buying your home less of a headache.
By the time you’re done reading, you will have a thorough understanding of a seller’s concession.
What Are Closing Costs?
Before explaining the seller’s concessions, it will be essential to understand what closing costs are.
It is crucial to understand that both buyers and sellers have closing costs. Closing costs are expenses that either a buyer or seller will pay over and above the home’s purchase price.
Here is a list of some of the potential buyer’s closing costs:
- Discount points
- Origination fees
- Title searches
- Title insurance
- Appraisal fees
- Property survey
- Deed recording fees
- Credit report fees
Costs that continue to be charged over the time of ownership include property taxes and homeowners insurance. Lenders are required by law to present all of the costs associated with the purchase of a home to the buyer within at least three days of a mortgage loan application.
What Are Seller Concessions?
Sellers’ concessions are when the owner of the home agrees to pay some of your closing costs. This might be because you have asked them to help pay a particular fee, or they could just pay a percentage of the entire closing costs.
Home buyers are more apt to be successful in a buyer’s market at getting a seller credit. In a seller’s market, buyers are often discouraged from asking for any seller assistance. In fact, in hot real estate markets where bidding wars are prevalent, it would be a gross mistake to ask a seller to pay for the buyer’s closing costs. A seller is not going to need to pay any portion of a buyer’s closing costs.
Your offer would likely be put to the bottom of the pile when you ask for sales concessions. When prices are rising, a home seller is in the enviable position of being in the driver’s seat, often looking at multiple bids.
What is a Seller’s Assist?
A seller’s assist is no different than a seller’s concession. These terms have the same exact meaning. A seller’s assist can be used interchangeably when describing a homeowner assisting in paying a buyer’s closing costs.
So, the next time you hear someone suggest a seller’s assist, you will know they are talking about a concession.
What Fees Could a Seller’s Concession Pay For?
Many different fees make up your closing costs, and the seller can contribute to some or all of the buyer’s closing costs.
- Inspection fees; could include the cost of the home inspection or other types if required.
- Title insurance; is cover to protect the lender should the ownership of the property later become disputed. Buyers can also have their own title insurance policy. These are known as title fees.
- Property taxes; will be due at closing and will need to cover the rest of the year.
- Loan origination fees; are charges that cover the costs of arranging the loan.
- Appraisal costs; the lender may require an appraiser to assess the property’s value to check that they aren’t lending more than the home is worth.
- Attorney fees; depending on the state you live in, an attorney might be needed to check the paperwork.
- Recording fees; the local government might have fees to register the change of ownership.
- Mortgage discount points are a fee to reduce your interest rate on the home loan.
Both loan origination fees and mortgage points would be considered a financing concession.
The loan program a buyer chooses could have some bearing on the costs involved.
You will be given an idea of your closing costs when you apply for a loan. The lender is required to give you a loan estimate that will show you how much money you will need to spend on closing day.
Your real estate agent can assist you in deciding which fees you would like the seller to help cover.
The Advantages of Seller Concessions
The benefits of concessions to buyers are clear. They allow you to save money on your closing costs. When you buy a home, you will need thousands to pay closing costs and your down payment, so if the seller is willing to offer some concessions, it can make a big difference.
The advantage to the seller of these concessions is that it can make sure their home gets sold. The longer the home has been on the market, the more eager the seller could be to help a buyer close quickly.
If it is a buyer’s market and property values are declining, paying a buyer’s closing costs can go a long way to completing a sale. The amount of seller concessions is always negotiable.
The Disadvantages of Seller Concessions
As a buyer, asking for concessions from the seller can have some negatives. The seller might not be willing to pay some of the buyer’s fees or deal with this type of request. If that is the case, the seller might prefer to find another offer.
In situations where the seller has multiple offers, the buyer asking for concessions is more likely to lose out on the home. The seller might reject offers with concessions attached very quickly, making it a better idea for the buyer to pay all of the closing costs and offer a lower price for the home instead.
It is essential for buyers to gauge the current market. An experienced real estate agent can be looked towards for proper guidance. When homes are in high demand, it is usually best to avoid asking for closing cost credits.
Negotiating Seller Concessions
If you have decided that asking for a seller concession is a good idea, you still need to persuade the seller to agree.
Whether you will convince the seller will depend on the local market conditions and the negotiation process.
Favorable market conditions for sellers will make the chances of receiving concessions more difficult. But if the home and others in the area have been stuck on the market for a long time, the seller will be more eager to agree to things that they wouldn’t otherwise.
If the owner doesn’t see any other prospects of finding a buyer, you will be in the driving seat to negotiate a concession.
If things aren’t quite as clear-cut in your favor, not going too far with your demands will be more likely to be successful.
A seller is more likely to be favorable to offers that are less conditional and complicated.
So if you want to request they deal with some repairs to the home, asking for concessions might be a more difficult negotiation.
If you’d like some concessions, but you aren’t sure what or how much to ask for, your real estate agent should be able to assist you.
Your real estate agent will have a good understanding of the market and be able to find other examples where sellers gave concessions to other buyers.
With this information, you might more easily persuade a seller if they know others in the area have been giving concessions to buyers.
Your real estate agent should be able to advise the best approach in your market.
Whether it is better to reduce your offer or ask the seller to assist with paying closing costs will depend on the local conditions.
Seller Concessions Can Be a Win-Win
A seller concession does not necessarily have to be money coming out of a seller’s pocket. A seller could assist the buyer by paying for a portion of their closing costs which could be added back to the home price.
For example, let’s say the total closing costs are going to be $8000. That same dollar amount could be tacked onto the amount the buyer is willing to pay for the home.
So if the home is listed for $300,000 and the buyer is willing to pay that amount, they could agree to pay $308,000 while asking for an $8000 closing cost credit. This is a great way of making it a win-win scenario for both parties.
By raising the home’s sale price, the seller still will net the same amount of money while the buyer gets their upfront costs paid for by the seller. The purchase price of the home can be manipulated to work for both parties.
Another name for costs of the buyer paid for by the seller is called interested party contributions. You can take a look at the Fannie Mae website for guidance on what is allowed.
Limits on Concessions
The amount of seller concessions is dictated by the buyer’s loan program. Even if you want them to, or your seller is willing, they aren’t allowed to contribute all of your closing costs. There are different levels of contributions allowed depending on the type of home loan you are applying for.
Sellers aren’t allowed to give concessions that are more than the entire closing costs. So if you are buying a $200,000 home, you could get $12,000 from the seller, but if your closing costs are half that, you are only allowed $6,000.
The reason for limiting seller contributions is to prevent inflation in the market. HUD and Fannie Mae set the rules to avoid adding more upward pressure in the housing market.
What could otherwise happen is that sellers give larger contributions to buyers to make it easier for them to buy in exchange for a higher purchase price. While this could help many people purchase, it will push up house prices.
Since previous sales data is used to value homes, this will increase inflation in the market. It will also increase rental prices so that the whole market situation could spiral out of control without these restrictions.
Contribution Limits By Mortgage Types
There are seller concession contribution limits in a real estate transaction. Depending on the type of home loan you are using, the limit will vary.
Whichever is lower between the sale price and the appraised value will set the seller’s contribution for closing costs.
If you were to offer $210,000 for a home and the appraiser’s report says it is worth $200,000, the seller will be able to contribute based on the lower amount in most cases. This would be $6,000 for a 3% limit and $12,000 for 6%.
Though, of course, contributions can’t be higher than the closing cost amount, whatever the percentage allowed.
Contribution limits for conventional loans changes depending on the buyer’s down payment amount, apart from when someone is buying an investment property. Investors can only accept concessions of 2% regardless of the down payment.
The greater the down payment the buyer is making, the more the seller can contribute towards closing costs. With a down payment below 10%, the seller is limited to 3%.
If you are putting down between 10 and 25%, the seller has the option of giving you as much as 6%. Down payments above 25% allow sellers to offer contributions up to 9%.
The amount of seller’s concessions works differently with an FHA loan. The seller contribution has a maximum amount of 6%, no matter what the buyer’s down payment or other factors are.
With FHA loans, borrowers are required to pay private mortgage insurance. This cost is paid over the life of the loan. A seller is allowed to contribute to a buyer’s upfront mortgage insurance premium.
With VA loans, seller contributions are limited to 4%. However, these contributions can go towards other things than just the normal closing costs.
The seller can pay for the funding fees for the VA loan, as well as debts and buyer’s judgments. If you are a veteran using a VA home loan, it is essential to understand the VA funding fee. Take a look at the excellent resource that explains what you need to know.
Given that VA mortgages are often no down payment loans, it is not unusual at all for a buyer to ask for a seller’s concession. Quite often, offers are structured for money to come back to the buyer to pay for closing costs.
The USDA loan restrictions are a little different, with a 6% limit on contributions, but instead of using the sales price or the appraiser’s valuation, the mortgage lender uses the loan amount. 6 percent, however, should be more than adequate for a seller’s concession.
The Home Inspection Could Trigger Seller’s Concessions
The home inspection is often where a renegotiation could take place. If problems are discovered that need major repairs during the inspection period, it is certainly possible a seller’s concession is given.
Experienced real estate agents will often recommend their seller client give a concession rather than make repairs.
By providing the potential buyer with a closing cost credit, you don’t have to complete repair work to their satisfaction. Sellers are much better off coming up with a dollar amount and either deducting that amount of money from the purchase price or giving the concession.
Look at Your Bottom Line, Not The Home’s Sale Price
Over my thirty-five years in selling real estate, there have been times when a seller has become disenchanted because a buyer has asked for a closing cost credit. The home’s sale price is far less important than what a seller nets from the sale.
For example, if you are selling a $400,000 home and the buyer offers $395,000 with a $5000 seller’s concession, this is no different than a buyer offering $390,000. Depending on the real estate market, a $390,000 net to the seller may be great. What sellers need to do is focus on their bottom line and not get angry a buyer has asked for a credit.
If the market value is X amount of dollars, it makes no difference how it is achieved. What’s important is completing the sale of the home for the most amount of money.
Final Thoughts on Seller’s Concessions
Sellers’ concessions hold the promise of making buying a home more affordable. If the seller is willing to agree to help the buyer with their closing costs, it can make the home easier to sell. A seller assist can be extremely beneficial to some buyers.
Since there are some negatives to asking the seller for concessions, you will need some advice from your real estate agent. If the conditions are in your favor, you could try to negotiate to reduce your closing costs.
As long as you don’t receive more money than your loan type allows or more money than the closing costs, you will stay within the rules. Hopefully, you now have a much better understanding of how seller’s concessions work. Before you know it you’ll be sitting at the closing table signing the final paperwork.
About the author: The above Real Estate information on what are seller concessions was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at firstname.lastname@example.org or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 34+ years.
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