What are seller concessions? Here’s what you need to know

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Sometimes, in order to make a sale go more smoothly, sellers may pay some of the buyer’s closing costs or work with buyers to adjust the overall home price. This process is known as seller concessions, and it’s a useful way for buyers and sellers to find common ground during a home buying negotiation.

If you’re interested in requesting or offering seller concessions, it’s important to first understand the state of the market, and what is at stake for you to gain or lose from the concession. When used strategically, seller concessions offer a win for buyers and sellers alike.

What are seller concessions?

Seller concessions, sometimes called closing cost credits, are closing costs that the seller pays on behalf of the buyer. Seller concessions are either made as a percentage of the total closing costs, or for specific line items of closing expenses.

Seller concession vs. price reduction 

Seller concessions are often conflated with price reductions. While these tools are both used to help buyers and sellers get to closing day, they provide relief to buyers in different way:

A seller concession provides limited assistance for a buyer in the form of immediate and short-term relief from some closing costs. In contrast, a price reduction provides larger scale assistance by lowering the actual purchase price of the property, the cost of monthly mortgage payments, and final closing costs (because some of these costs are proportional to the sale price).

While a price reduction may seem the obvious preferred solution (who wouldn’t like to keep more of their monthly income?) — it’s not always possible. Price reductions can be hard to come by, particularly in low-inventory markets (like the current one). Seller concessions offer a tidy solution for buyers and sellers to meet in the middle.

Want to know how a price reduction could lower your monthly mortgage payments? Use our Mortgage Calculator to find out.

What can seller concessions cover?

A buyer’s loan estimate shows all estimated closing costs. Depending on the situation, a buyer and seller can work together to identify possible concessions. They may include one or more of the following:

  • Property taxes: Sellers may opt to pre-pay property taxes through the end of the year.
  • Title insurance: This policy protects the buyer and lender in case someone comes forth with a claim for the home’s title.
  • Loan origination fees: These fees are charged by the lender for processing the loan and typically range from 0.5% to 1% of the total loan amount, to be paid at closing.
  • Home inspection fees: These inspections provide a thorough diagnosis of the home’s condition. They are not always required, but are often a good idea.
  • Recording fees: This fee is required to document the home’s purchase with the local government.
  • Appraisal fees: Lenders require an appraisal by an unbiased third-party to ensure that the home is worth the amount of the loan or more.
  • Attorney’s fees: Some states require a real estate attorney to review closing documents.
  • Mortgage points: A buyer may have had to pay upfront to reduce their interest rate.

Example of a seller’s concession

Sometimes, sellers may actually increase the purchase price of the home to use that additional profit to help cover the buyer’s closing costs. So what’s the point then? This adjustment helps the buyer lower their upfront closing costs by allowing them to roll that cost into their mortgage.

Let’s see this in practice: Say that a home’s list price is $300,000. The buyer needs 5% to help cover their closing costs, so they request a $5,000 seller concession. If the seller agrees, the final purchase price will be $305,000, but the seller will pay the buyer’s closing costs with the extra $5,000 they receive from the buyer’s mortgage lender.

Other times, sellers will opt to cover the buyer’s closing costs out of their own pocket or out of their home sale proceeds. Use our Home Sale Calculator to see just how much seller concessions can affect your bottom line.

Is a seller’s concession a good idea?

Seller’s concessions can help both buyers and sellers when used strategically. For sellers, these concessions can make their home more appealing to buyers, especially in a buyer’s market. For buyers, seller concessions can make closing easier if they don’t have cash on hand for closing costs after paying an earnest money deposit and down payment upfront.

More benefits of seller concessions

For buyers, seller concessions have the obvious benefit of lowering the amount they have to spend to buy a house. Since closing costs can often be a few thousand dollars, concessions could save the buyer a significant amount of money.

But concessions can also be beneficial for sellers in some situations. If you’re struggling to sell a house, offering concessions may get it off the market faster. A closing cost credit feels like an incentive or bonus to some buyers. With such a huge financial investment, buyers will be looking for ways to save some money upfront. They can instead put that money into furniture or home improvements. 

If there are issues with the home that require maintenance, offering to pay closing costs for the buyer rather than make the fixes yourself can make the sale process go faster.

Drawbacks of seller concessions

As is usually the case in real estate, nothing is all pros and no cons. Asking for seller concessions may make you a less appealing buyer since most sellers prefer offers without strings attached. If a home has multiple bids, a seller will probably ignore offers with concession requests. This is especially true in a seller’s market, which most of the country has been in since at least 2019.

Additionally, sellers cannot cover all closing costs. How much a seller can offer in concessions depends on the type of loan a buyer uses.

Are there limits to seller concessions?

Mortgage rule-makers like Fannie Mae and the United States Department of Housing and Urban Development (HUD) enforce concession limits to discourage housing market inflation.

If sellers could offer any amount for closing costs (and be rewarded with fewer days on the market and a faster closing process), sellers would be incentivized to fold those expenses into their listing price. In turn, this could drive up home prices artificially, leading to inflation.

As such, a seller can only contribute a small percentage to closing costs depending on the buyer’s loan. The amount a seller can pay in concessions is based on the lower number between an offered sale price and the property appraisal value. 

Concession limits by loan type

Different types of mortgages carry different restrictions here are the limits for the most common varieties of home loans:

  • Conventional loans: Sellers can contribute up to 3% if a buyer’s down payment is less than 10%, up to 6% if a buyer’s down payment is 10% to25%, or up to 9% if the buyer’s down payment is more than 25%. If the property is an investment and not a primary residence for the buyer, however, the seller’s contribution is maxed out at 2%.
  • FHA loans: Sellers can contribute up to 6% of the home price for all FHA loans. Again, “home price” in this instance means the lower number between the appraised value and the actual sale price.
  • USDA loans: Sellers can contribute up to 6% of the buyer’s loan amount.‍
  • VA loans: Sellers can contribute up to 4% of the home price. Seller concessions may include payments toward a buyer’s judgements and debts or VA funding fees in addition to closing costs.

How do you negotiate seller concessions?

The key to all negotiating in real estate is to first understand the market. This will help you determine what, if any, leverage you have in negotiations.

For example, sellers are more motivated to offer concessions in buyers’ markets, or when their home has been sitting on the market for a while. If either of these are true for the house you want to buy, the seller may have a compelling reason to offer you some concessions.

When you ask for concessions, be strategic about what you suggest. Remember, sellers can’t cover all closing costs, so think about which costs would sweeten the deal the most for you. If you don’t have a lot of cash on hand, you might target the origination and attorney fees. Or if you’re asking for concessions and repairs, you might request a price reduction in exchange for covering the closing costs yourself.

A real estate agent is a valuable resource for helping strategize the best course of action for negotiating seller concessions. They can even find similar properties that were sold with concessions to strengthen your case to sellers.

There’s power in compromise. That’s the key when it comes to seller concessions. Yes, concessions may require sellers to pay a little money out of pocket or give up some negotiating power, but they’re a good tool to make real estate transactions go smoothly. And they could even save you money on taxes or closing fees. Before you take a hard line, at least consider what concessions might be able to do for you.

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