First Time Home Buyer’s Guide To Seller Concessions
December 10, 2021
Many home buyers, particularly first time home buyers, are surprised to learn that there are many hidden costs that come with buying a house. Things like closing costs, down payment, and home inspection fees can add up to a hefty amount. Closing costs alone normally range from 2% to 5% of the house’s purchase price.
It may be daunting to learn about these costs, especially if they put you over your budget. However, seller concessions are a solution that may help buyers reduce their closing costs.
What Are Seller Concessions?
Seller concessions are the closing costs for buyers that the seller agrees to pay. They can be seen as a gift from the seller to the buyer. Concessions can be discussed on the homeowner’s side of the bid or a buyer can include concessions in the proposal to lower the overall cost.
How Do Seller Concessions Work?
If the buyer accepts the seller concessions proposed by the potential buyer, then the next discussion is about what closing costs will be covered and how the seller will pay them. There are two primary ways in which the seller pays these concessions:
Sellers can deduct the sum of the agreed concessions from the proceeds from the property’s sale.
For example, if the seller earns $100k from the transaction but agrees to pay $3k in concessions, their property will be sold for $97k.
Or, sellers can include the sum of the agreed concessions in the purchase price of the property being sold. Buyers may prefer this option if they wish to add the closing costs to their mortgage payments instead of their upfront costs. In such a case, let’s say if the starting cost was $150,000 and the seller promised to cover $4,500 in concessions, then the revised value of the house will be $154,500.
Seller Concession Limits Based on Loan Type
Depending upon the mortgage loan type you are eligible for, there are certain limits put in place by the lender on what closing costs a seller can and cannot assist you with.
1. FHA Loan
In case of FHA loans, the seller can cover the following closing costs:
- Prepaid mortgage interest
- Origination fees
- Discount points (to lower your interest rate)
- Mortgage insurance premium to be paid upfront
Many loans also limit the amount of concessions a seller can agree to. On FHA Loans, the seller can cover concessions at up to 6% of the house’s price or appraised value. For example, if the seller’s house is appraised for $200,000 and you get an FHA loan, the seller can pay $12,000 max or 6% of $200,000 in concessions. Most mortgage loan limits on seller concessions are based on sale price or appraised value rather than the loan amount.
2. Conventional Loans
In case of conventional loans, the limits vary based on the amount of down payment. Seller concessions can cover up to…
- 3% for less than 10% down payment
- 6% for 10-25% down payment
- 9% for 25% or more down payment
3. VA Loans
With VA loans, you are allowed to receive up to 4% of the loan amount in seller concessions. However, the loan fees and payments that are eligible for seller concessions differ from other loan types. The following are fees that the seller can pay for:
- The VA funding fee
- Prepayment of property taxes
- Loan origination fees
- Credit reports
- The VA appraisal fee
- Recording fee
- Title insurance
- Credit balances or judgment liens on behalf of the new buyer
- Extra points to bring their mortgage interest rate
- Escrow funds
Find all of the information on the seller concession limits for VA loans here.
For USDA Loans, borrowers are allowed receive up to 6% of the loan amount covered by seller concessions.
Seller Concessions: Advantages and Disadvantages
Seller concessions are a tempting option for potential buyers to save money. However, there are both advantages and disadvantages associated with them.
The Advantages Of Seller Concessions
- As a buyer, you’ll almost always need to have money ready for the closing costs, security deposit, and down payment. Seller concessions can drastically reduce closing costs, lowering the cost of the overall home.
- Both parties, buyer and seller, may benefit from using seller concessions. Concessions can help buyers reduce the monetary strain of buying a house by removing a few of the closing costs, while homeowners can use concessions to sell their houses quicker and attract more buyers.
Disadvantages of Seller Concessions
- Requesting seller concessions, on the other hand, may deter sellers. Most sellers are looking for offers with little to no stipulations.
- If there are many proposals on a home, the owner is likely to ignore proposals that contain many concession demands. In this case, it might be better to make a lower offer on the house and pay for the closing fees personally. This alternative is more convenient for the seller and could boost your chances of getting your offer approved.
- Furthermore, seller concessions might not even benefit you in the long run. For example, if the seller concessions are rolled into the mortgage amount, it gets added to the interest you’ll be paying over the life of the loan.
Why Should a Seller Make a Concessionary Offer?
Ideally, a seller might be willing to make concessions to enable a potential buyer to realize his or her goal of owning a property, but this is rarely the situation. Whenever an owner is eager to sell their property quickly, they usually accept seller concessions for their own convenience. Like if the house is on the marketplace for too long or they are hoping to sell extremely quickly.
Should You Negotiate Seller Concessions Yourself?
Hiring a professional like a real estate agent is always recommended when dealing with real estate transactions. Professionals are more knowledgeable about the typical practices and best methods in real estate transactions. They can also help you determine which closing costs to request that seller concessions cover and bring a wealth of experience in negotiating with sellers.
Financial experts can also be of great help. They can determine how concessions may impact your taxes, finances, etc. If your finances are limited, you should consider your financial health after buying the house. There are still fees that come after the home sale is official. Here are a few expenses to expect:
- Costs of relocation
- Insurance for property owners
- Taxation on real estate
- Property insurance provided by a private company
- Increased utility expenses
- Fixes, servicing, and substitutes
- Ladders, leaf blowers, snowblowers, and other home renovation and gardening equipment
If you need seller concessions to purchase a property or have concerns regarding the extra home ownership expenditures, maybe buying a house isn’t the best option for you right now.
On the surface, seller concessions seem like a great way to reduce closing costs along with the overall cost of the house. However, there are a lot of nuances to seller concessions and stipulations that make using them complicated. Discussing your questions about seller concessions with a real estate agent or professional is one of the best ways to accurately look at all of your options and how each choice can affect you down the line. You can always contact an NRP, some of the best real estate agents in the US, if you need any extra advice.