Shared from Cross Country Mortgage. 05, May, 2023
Buying a home is expensive, especially in the weeks preceding and following closing. Homebuyers can be caught off guard by the money needed to cover down payment, closing costs, inspection fees, and home repairs.
However, they may be able to alleviate some of these expenses by negotiating seller concessions with the home seller. If the seller agrees, they may pay for part of the closing costs incurred by the homebuyer. This is typically equivalent to 2% to 5% of the home purchase price.
If the seller offers concessions, the buyer is able to save some of their funds for a larger down payment. Or, they can put those funds toward some of the other costs associated with moving and buying a house.
How Seller Concessions Work
By granting seller concessions, or seller assistance, the seller agrees to take on some of the costs associated with homebuying. These costs are typically paid at closing and can put a significant dent in the buyers’ savings.
Examples of Seller Concessions
Here are some examples of closing costs that the seller may agree to take on:
- Attorney fees: depending on the rules in your state, you may be required to hire an attorney to review the closing documents.
- Appraisal: lenders typically require a licensed third-party appraisal to ensure that the contract price aligns with the property’s market value.
- Home inspection fees: most would-be buyers request a home inspection to ensure that the property has no hidden defects. If the home inspector discovers potential issues, the sellers have an obligation to disclose them to other interested parties, even if the sale falls through.
- Origination fees: covers the costs associated with processing the loan.
- Title insurance: typically requested by the lender, it protects the buyer in case someone comes forth with a claim for the home’s title.
- Discount points: some buyers may opt to pay a fee upfront in exchange for a lower interest rate
- Homeowner association fees: if the property is part of an HOA, the sellers may have prepaid their dues.
Negotiating Seller Concessions
Your real estate agent is the best person to help you decide when and how to negotiate seller concessions depending on your local market condition and the house value.
Although obtaining seller concessions can undoubtedly be advantageous for the buyer, it may also make your offer less attractive to the sellers since it could diminish their proceeds on the house sales. In a seller’s market or a multiple-offer situation, asking for seller concession could cost you the house of your dreams.
Although the sellers may counter your offer with a contract price including the value of the seller concession, it can become an issue if the appraisal comes short. Financing is typically subject to the house appraising at or above the contract price.
If the appraiser has a lower opinion of value, financing may fall through unless the would-be buyers agree to bridge the difference in cash between the contract price and appraised value. Although it may salvage the sale, it would also defeat the buyers’ goal of reducing their upfront expenses.
On the other hand, requesting seller concession could help you provide a higher down payment, qualifying for more advantageous loan terms. In a buyers’ market, it could also help you purchase a house you may otherwise feel is overpriced.
Seller Concessions Vs. Closing Costs
Depending on what you negotiate with the sellers, the homeowner may agree to cover specific items in your closing costs or a certain percentage.
While the homebuyer would need to pay these fees in cash, it is not necessarily the case for the sellers. If the latter agrees to the concessions, they effectively agree to put some of the proceeds they would receive from the sale of the house toward financing the buyers’ costs.
As a result, the sellers may agree to the buyer’s request for the seller’s concession but can also respond with a counteroffer that includes the cost of these concessions in the sale price. For example, if the sale price of the house is $100,000, but the prospective buyers request $3,000 in seller concessions, the homeowner may agree to the concession but counter with a contract price of $103,000 in order to protect their earnings.
There are advantages and inconveniences for the buyer when it comes to paying closing costs upfront instead of asking for sellers’ concessions.
Seller assistance may reduce your expenses at first, particularly at a time when you may be short on cash after providing a down payment and facing additional costs like moving or decorating your new home. This will increase your borrowed amount, and you will need to pay interest on it, potentially adding thousands of dollars over the life of the loan. Seller concessions are considered to be sales expenses and are, therefore, tax deductible. Note that the appraised value will need to come in higher to cover the increase in the sales price.
Limits on Seller Concessions
Depending on the loan type you are using, there may be limits regarding how much sellers are allowed to provide in sellers’ concessions.
When it comes to conventional loans originated by private mortgage lenders, the maximum cap for seller concessions is based on the home price and the size of the down payment. Note that the percentages below are dependent upon the occupancy type of the loan.
- If the buyers provide less than 10% for a down payment, sellers may pay up to 3% in seller concessions.
- If the buyers provide between 10% and 25% for a down payment, sellers may pay up to 6% in seller concessions.
- If the buyers provide more than 25% for a down payment, sellers may pay up to 9% in seller concessions.
These rules are only valid for houses purchased as primary residences. Concessions are allowed on second and investment properties but at lower limits for investment.
Seller concessions for all Federal Housing Administration (FHA) loans are capped at 6%, regardless of the size of your down payment. In addition, the sellers cannot assist the buyer with the down payment.
United States Department of Agriculture (USDA) loans also cap seller concessions at 6% of the loan amount, regardless of the size of your down payment.
Veterans Affairs (VA) loans allow seller concessions of up to 4% of the loan amount. However, the VA allows the sellers to contribute toward the VA funding fee, pay off their judgments or credit balances, or prepay the buyers’ property taxes and insurance.