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.
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 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 and $12,5000 in closing costs.
Use our home affordability calculator to determine how much you can house you can afford.
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:
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 loan
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%.
Example:
If you were to purchase a $250,000 vacation home for your own use using a conventional mortgage and a 20% down payment, your lender would allow you to accept up to 6% (or $15,000) in seller concessions.
FHA loan
An FHA loan is insured by the Federal Housing Authority. They’re a popular option among first-time homebuyers because they have more relaxed credit requirements than conventional loans.
FHA seller concessions work similarly to conventional loans. Concessions are limited to 6% of the sales price or appraised value, whichever is less.
Example:
If you were to use an FHA loan to purchase a home for $250,000, but the home appraised for only $245,000, your lender would allow you to accept up to $14,700 (6% of $245,000) in seller concessions.
VA loan
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.
Example:
If you were eligible for a VA loan worth $250,000, your seller concessions would be limited to 4% (or $10,000).
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.
Pros
- 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.
Cons
- 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 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. 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?
