How Seller Concessions Work
6-minute readAugust 13, 2021
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It can come as a surprise to many home buyers – especially first time home buyers – that the real cost of purchasing a home can be much more than the sales price. Along with a down payment, a buyer may also be required to pay closing costs, appraisal and inspection fees, title insurance, property taxes and the cost of repairs. These expenses vary depending on each individual situation, but they typically range between 2% and 5% of the home’s value.
If you weren’t anticipating these costs or they end up totaling more than your budget allows, you could be forced to give up your dream home. But don’t throw the proverbial towel in just yet. For some buyers, seller concessions could be the answer.
What Are Seller Concessions?
Seller concessions are the costs a seller agrees to pay in order to reduce the amount of money the buyer must pay when closing on their home. These are typically negotiated as part of the offer on the buyer’s behalf. Sometimes, they’re requested up front. Other times, a buyer may add in a request for seller concessions later in the process to offset the costs of any necessary repairs the inspection uncovers.
How Do Seller Concessions Work?
During negotiations, the buyer works with the seller or their agent to come to an agreeable amount of money the seller will pay. How the seller pays these concessions varies, but there are two common ways:
- The amount is taken from the money the seller makes from the sale of the home. For example, if the seller receives $100,000 from the sale but agrees to pay $3,000 in concessions, they’ll receive $97,000 from the sale of their home.
- The amount is added to the sale price and therefore rolled into the loan amount, which the buyer pays off. For example, if the initial price of the home was $150,000 and the seller agreed to pay $4,500 in concessions, the new price of the home would be $154,500.
Usually, but not always, the amount is added to the sale price and rolled into the loan. Since concessions raise the sale price and thus the loan amount, the home must appraise for the new amount. It can’t appraise for lower because the lender can’t loan over the appraisal amount.
Seller Concession Limits
Concessions can only be used to reduce the buyer’s closing costs. They can’t be used for the buyer’s down payment or for any other costs associated with the home like new windows or appliances. The buyer can’t use the concessions to receive cash back at closing, either. A few costs that can be covered by seller concessions include:
- Appraisal costs
- Attorney fees
- Interest rate buydowns or points
- Origination fees
- Real estate tax service fees
- Title insurance
While there are several things the seller can pay for, there’s a limit on how much they can contribute. The amount will depend on the type of loan you have and, in some situations, how much you put down:
- Seller concessions on an FHA loan or USDA loan are limited to up to 6% of the loan amount.
- For Fannie Mae or Freddie Mac conventional loans, the limit is based on your down payment. If you put down 10% or less, the limit is 3%. For down payments above 10% but below 25%, the limit is 6%. For those able to put down 25% or more, the limit for seller concessions is 9%.
- Seller concessions on a VA loan don’t have limits for such costs as discount points, credit report fees or origination costs. However, the loan does have a 4% limit on some costs including the VA funding fee and escrow prepayment.
Before asking for seller concessions, talk with your lender to learn the maximum amount you can receive.
Why Would A Buyer Ask For Concessions?
Closing costs can add up to thousands of dollars, and they fall on the buyer to pay them (usually up front and out of pocket). Seller concessions help lighten the burden of closing costs by having the seller pay for some of them. This helps the buyer save money up front. A buyer who can’t afford their closing costs or a buyer who wants to reserve those funds for other expenses such as home improvements or moving costs may want to ask for concessions.
Why Would A Seller Pay Concessions?
In a perfect world, a seller would want to pay concessions to help a fellow human achieve the dream of homeownership, but that’s not usually the case. Typically, a seller will agree to pay concessions when they’re trying to sell their home fast. This could be because their home has been on the market for a while with no promising offers or they’ve already bought a new home and are currently paying two mortgages. Just how motivated the seller is to pay concessions may also depend on market conditions.
Seller Concessions In A Seller’s Market Vs. A Buyer’s Market
In a seller’s market there are more buyers than there are homes for sale, which gives the seller the upper hand. Because their home may be in high demand, they’ll most likely get numerous offers. Chances are they’ll take the offer that provides the most money with the least amount of strings attached. If it’s a seller’s market, it may be more difficult to get the seller to pay concessions.
On the other hand, the seller may be more motivated to pay concessions if it’s a buyer’s market. That’s because in a buyer’s market there are more homes for sale than there are buyers, and sellers may have a more difficult time selling their home. Competition among sellers may be high, so offering to pay concessions gives them an edge by sweetening the deal and attracting more buyers.
Pros And Cons Of Seller Concessions
Before you ask for seller concessions, weigh the pros and cons. Yes, the benefits may tempt you, but concessions only work if the seller agrees to pay them. Even then, they may not be the best option for you. Here’s what to consider.
Seller Concessions Pros
Seller concessions can benefit both the buyer and the seller. For buyers, concessions may lighten the financial burden of purchasing a home by taking away some of the upfront closing costs. For sellers, concessions can help sell the home faster and provide an opportunity for a larger pool of potential buyers.
Seller Concessions Cons
It may be difficult to get the seller to agree to pay concessions. After all, they typically want to get the most money they can from the sale of the home. And if they’re moving to a new home, they’ll have their own costs to pay. If they have other offers without concessions, you could lose out on the home you love. Even if they do decide to negotiate with you, concessions could prolong the deal and sour the relationship quickly.
Aside from that, seller concessions may not help you in the long run. In fact, you may end up paying more over the years than you would’ve paid up front at closing. If you roll seller concessions into your loan, the loan balance goes up. That means you’ll need to pay a higher down payment and you’ll pay more on interest throughout the life of the loan.
Are Seller Concessions Worth It?
If you’re considering asking for concessions, it may be best to work with an experienced real estate agent. They’ll know more about the state of the local housing market (i.e., whether you’re in a buyer’s market or seller’s market) and help you decide which closing costs to ask the seller to pay for. Since they’re experienced in negotiating real estate deals, they’ll also be able to help you best present your offer and work with the seller during negotiations.
You should also speak to a financial advisor to see how this could affect your taxes, budget and other financial goals. If money is tight you’ll want to think about whether you can also afford the costs of homeownership (i.e., what you’ll pay after you close your loan and purchase the house). Post-closing costs can include:
- Moving expenses
- Homeowners insurance
- Property taxes
- Private mortgage insurance
- Higher utility bills
- Maintenance, repairs and replacements
- New furniture and appliances
- Home improvement and landscaping tools like a ladder, lawn mower, snowblower, etc.
If you absolutely need seller concessions to purchase a home or you’re worrying about being able to afford additional homeownership costs, you may want to reconfigure (and even lower) your house budget or put off buying a home while you save up more money. Buying a home is an exciting life moment, but you don’t want to put yourself in financial straits to do it.
If you’re ready to purchase a home,get started with Rocket Mortgage® or give one of our Home Loan Experts a call at (888) 452-8179. If you need a real estate agent who can assist you with finding your new home and making an offer, visit Rocket HomesSM to work with a highly-rated local expert.
1Rocket Mortage®, Rocket HQSM and Rocket HomesSM are separate operating subsidiaries of Rock Holdings Inc. Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation, and applicable legal and regulatory requirements.
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