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Homes can be expensive, and for some, it’s the most expensive purchase they’ll ever make. You need to save up enough funds to cover a down payment and pay for closing costs. That initial outlay of money can be a lot, especially for first-time home buyers.
But many first-time home buyers may not realize that they can get help covering some of these upfront costs from an unexpected source: the person selling the home they want to buy.
When the seller agrees to cover part of your closing costs, it’s known as seller concessions. These concessions could save you thousands of dollars in upfront expenses when you buy a home.
But what’s considered a seller concession? How do they work? We’ll discuss some of the limitations and how seller concessions can sometimes help bring a deal to the closing table. Read on to find out more.
Seller Concessions, Defined
Seller concessions go by different names, including financing concessions, seller’s assist, seller assistance, seller credit, seller contribution or interested party contributions (IPCs).
Whatever you call them, a seller concession means that the seller agrees to pay a part of the buyer’s closing costs.
As a quick reminder, closing costs are the fees buyers pay related to the sale of a home. Closing costs are usually between 2% – 6% of the home sale price.
When a seller pays closing costs, that frees up money for the buyer that they can apply toward the down payment, moving expenses and home improvements or repairs.
What Costs Can Concessions Cover?
The first thing you need to know about seller concessions is that there are very specific limits on what they can cover.
Seller concessions can’t be used to cover a down payment or any portion of the loan balance. Concessions are usually limited to covering closing costs and fees. These can include:
- Appraisal and inspection fees: The appraisal fee covers the cost of assessing the fair market value of the home. The inspection fee covers the cost of inspecting the home for any issues that may need to be addressed before closing.
- Property taxes: The money you may need to cover property taxes that are prorated through the end of the year. The taxes may be due at closing.
- Title fees and title insurance: The title fee is the cost of checking and confirming that the seller has the right to sell the home. Title insurance protects you and your lender from financial losses if the seller doesn’t have the right to sell the home.
- Mortgage origination fee: This is the amount your lender will charge to process your loan application.
- Mortgage discount points: This is an optional, upfront fee paid to lower your mortgage interest rate. One point usually equals 1% of the loan’s value, and it can lower your mortgage interest rate by 0.25% or more.
When you apply for a loan, these fees will be detailed in your Loan Estimate, which outlines all of your estimated closing costs. Your real estate agent can help you decide which ones to ask the seller to cover.
Why Would a Seller Offer Concessions?
If you’re a home buyer, you may be wondering why a seller would be willing to give you money they don’t have to give you. Well, the two biggest reasons are time and competition.
Let’s say you need to sell your home to make the down payment on a new house you’re looking to buy. You go through all the motions and recruit a real estate agent, get the home listed, hold a few open houses and you even drop the price. But, for some reason, your home isn’t moving.
Suddenly, time is running out, your down payment is in jeopardy and the window on the busy real estate season is slowly closing.
Offering seller concessions may be a way to attract a buyer who’s on the fence and get them to commit to buying your home.
Will it cost you a little extra? Yes. But paying a little extra out of the profit you’ll make on the home’s sale will mean moving into the new home. It’s a smaller price to pay than what it would cost to make mortgage payments on your new home and the home you don’t live in anymore.
Maybe it’s a buyer’s market and supply is exceeding demand. Lots of homeowners in your neighborhood are selling their homes, interest rates are high and home buyers have lots of properties to choose from.
If a buyer is choosing between your home and your neighbor’s home, offering seller concessions may convince a buyer to buy your home instead.
Can a Home Buyer Ask For Concessions?
If the seller indicates that they’re willing to offer concessions to get their house sold, then go for it. But what if they aren’t offering? Can you still ask for concessions?
The short answer is yes, but you’ll want to proceed with caution and get input from your real estate agent first. Otherwise, you run the risk of your offer getting rejected outright.
When should you ask? Well, that depends on two key factors.
When it’s a buyer’s market
Buyers should feel confident about asking for seller concessions in a buyer’s market. If it’s a seller’s market, the seller is likely juggling multiple offers and there will be less incentive for a seller to agree to any concessions.
You can offer something in return
In some cases, you may be able to convince a seller that offering concessions is in their best interest.
Let’s say that a seller refuses to negotiate on the sale price, but their asking price would make it harder for you to afford the down payment and closing costs.
You may want to let the seller know that you may be able to offer more for the home if the seller agrees to concessions that reduce your upfront costs. It would be a win for you because you save money upfront. And it would be a win for the seller because they walk away with more at closing.
Are There Limits on Seller Concessions?
There are limits on the total percentage of home value that seller concessions can cover. The limits usually depend on the type of loan you have and the size of your down payment.
Limits for conventional loans
Fannie Mae and Freddie Mac set very specific limits on the maximum size of seller concessions for a conventional loan. The limit is based on your loan-to-value (LTV) ratio (how much you owe on your mortgage divided by the value of the home).
The home buyer’s initial LTV is based on the size of the down payment. So, for example, if you bought a home and made a 20% down payment on it, your LTV would be 80%.
If you’re taking out a mortgage for a first or second home, the maximum seller concession would be:
|LTV Ratio||Down Payment Amount||Maximum Seller Concession|
|More than 90%||Less than 10% down||3% of home value|
|75% – 90%||Between 10% – 25% down||6% of home value|
|Less than 75%||More than 25% down||9% of home value|
Remember, seller concessions are limited to closing costs. If you buy a $200,000 home and put 10% down, you could ask the seller for a concession of up to 6% (or $12,000). But, if your closing costs total up to $8,000, you can’t ask the seller to cover more than that.
BTW, if you’re buying an investment property, the maximum a seller can offer in concessions is 2% regardless of the type of loan you get.
Seller concession limits for FHA, VA and USDA loans
No matter how large or small your down payment is, seller concessions for FHA and USDA loans are capped at 6%. Like conventional mortgages, the concessions can’t be used for the down payment.
VA loans only allow seller concessions up to 4% of the loan value. On the plus side, the money can be used to cover the VA funding fee. The fee is a standard closing cost that usually ranges between 1.4% – 3.6% of the loan value.
Seller Concessions, Final Thoughts
Seller concessions are more than giveaways. They can be a valuable negotiating tactic between a home buyer and a home seller.
When you or your agent negotiates the purchase agreement with the seller or their agent, the concessions must be understood and agreed on by both sides before closing so there are no last-minute disagreements that could derail the sale.
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Fannie Mae. “B3-4.1-02, Interested Party Contributions (IPCs)” Retrieved October 2021 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-4-Asset-Assessment/Section-B3-4-1-General-Asset-Requirements/1032996781/B3-4-1-02-Interested-Party-Contributions-IPCs-08-04-2021.htm#footnote-3651-1
U.S Department of Veterans Affairs. “VA Funding Fee And Loan Closing Costs.” Retrieved October 2021 from https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/