A Comprehensive Guide to How Seller Concessions Work
When purchasing a house, you incur closing costs and fees to cover the expenses related to obtaining a mortgage. Typically, closing costs range from around 3% to 6% of the home's price.
In certain instances, you may have the opportunity to have the seller agrees to pay a portion of these closing costs. These are referred to as seller concessions, and they can be a valuable means to reduce your closing expenses. Before finalizing your mortgage, it's essential to understand how to leverage seller concessions to your benefit.
Defining Seller Concessions in Real Estate - Asking For Seller Concessions
Seller concessions encompass the closing costs that the seller has agreed to cover. At times, you can ask the seller to contribute towards specific closing costs, while on other occasions, sellers may opt to pay a percentage of the overall closing costs.
Seller concessions refers to closing costs that the seller has agreed to pay on behalf of the home buyer. These can include the cost of repairs to the property and other expenses typically borne by the buyer. Essentially, it's an arrangement where the seller offers to pay closing costs to facilitate the sale of the property.
Covered Closing Costs Through Seller Concessions
Seller concessions can help the following closing costs:
Property taxes: Covers pre-paid property taxes up to the year's end at the closing.
Title insurance: Safeguards both you and your lender in case of a title claim.
Loan origination fees: Includes the lender's expenses for processing your home loan.
Inspection fees: Addresses the cost of necessary home inspections, such as pest inspections, depending on your state's requirements.
Recording fees: Deals with the expense of documenting your home's purchase with your local government.
Appraisal fee: Covers the cost of an independent appraisal to determine the property's market value.
Attorney’s fees: In some states, real estate attorney fees are needed to review closing documents.
Points: Mortgage points, also known as discount points, involve upfront interest payments that lower your mortgage interest rate.
Once you apply for your loan, your lender will provide you with a Loan Estimate outlining all the estimated closing costs. You can then collaborate with your real estate agent to decide which closing costs to request the seller to cover.
What Are The Advantages from Seller Concessions?
Seller concessions offer advantages to both buyers and sellers. For sellers, providing concessions can make their home more appealing to potential buyers, especially in a buyer's market.
Seller concessions also assist buyers who might not have readily available cash to cover all their closing costs. First-time homebuyers, in particular, often underestimate the expenses linked with purchasing a home, making seller concessions an effective way to alleviate some of these costs and enhance affordability.
Pros and Cons of Seller Concessions
For buyers, requesting seller concessions comes with both advantages and disadvantages. Before making a decision, it's crucial to understand what you're asking for and what it might entail.
Advantages of Seller Concessions
Seller concessions reduce the amount you need to pay at closing, making homeownership more affordable. Typically, buyers are required to bring several thousand dollars for closing costs and the down payment. Seller concessions can significantly decrease these expenses, eliminating the need to deplete your savings to buy a home.
Agreeing to concessions can be advantageous for the seller in certain situations, particularly if they're eager to sell their home quickly. If expediency is a priority for the seller, they may be willing to contribute to the buyer's closing costs.
Disadvantages of Seller Concessions
On the flip side, asking for seller concessions could make you a less appealing buyer. In seller's markets, most sellers seek offers with fewer complexities and conditions.
If a home attracts multiple offers, sellers are likely to favor offers without concession requests. In such cases, offering a lower purchase price and covering the closing costs independently may be the better option, making your offer more appealing to the seller.
Negotiating Seller Concessions
Requesting seller concessions requires effective negotiation and understanding of the current housing market.
Know Your Market: Determine whether you're in a buyer's or seller's market, as this significantly impacts your ability to negotiate concessions. Sellers are more inclined to offer concessions in a buyer's market or when their home has been on the market for an extended period.
Limit Your Requests: If you opt for concessions, restrict additional demands. Sellers favor offers that are less complicated. If you ask for concessions alongside repairs, replacements, and other services, it's more likely the seller will reject your offer. If repairs are non-negotiable, consider offering a lower purchase price and handling the closing costs independently.
Engage a Real Estate Agent: Working with a real estate agent is advisable if you're requesting seller concessions. Agents possess local market knowledge, understand your area's housing conditions, and can identify similar properties sold with concessions. Presenting examples of recent seller concessions can motivate your seller to cooperate on closing costs.
Are There Limits on Seller Concessions?
Seller concessions can't cover the full extent of your closing costs. The extent to which the seller can contribute depends on your loan type and certain other factors.
Remember that the total amount the seller contributes can't exceed your total closing costs. For instance, if you purchase a $200,000 home with a conventional loan and a 20% down payment, resulting in a $160,000 mortgage, with average closing costs of 6%, the seller's legal contribution is limited to $9,600. However, if your closing costs for this mortgage are only $5,000, the seller can't provide more than $5,000 in concessions.
Why Are There Limits to Seller Concessions?
Seller concessions have limits to prevent inflation in the housing market, a concern addressed by organizations like Fannie Mae and the Department of Housing and Urban Development (HUD). Unrestricted concessions could lead to rising home prices. For instance, if a seller offers a home worth $150,000 for $175,000 and offers $25,000 for closing costs, it could inflate local housing prices. To prevent this, sellers can only contribute a small percentage of their home's value to closing costs.
Seller Concession Limits by Loan Type
The limits on seller concessions may vary by loan type and are typically determined by the sale price or appraised value.
Conventional Loans: The seller can contribute:
Up to 3% if your down payment is less than 10%
Up to 6% if your down payment is between 10% and 25%
Up to 9% if your down payment exceeds 25%
For investment properties, the seller's contribution is capped at 2%
FHA Loans: For all Federal Housing Administration (FHA) loans, the seller can contribute up to 6% of the purchase price, covering expenses such as closing costs and appraisal fees.
USDA Loans: In U.S. Department of Agriculture (USDA) loans, the seller can contribute up to 6% of the buyer's loan amount, not tied to the home's price.
VA Loans: Department of Veterans Affairs (VA) loan rules permit the seller to contribute up to 4% of the purchase price, which can include payments towards buyer judgments, debts, and VA funding fees.
Seller Concession FAQs
Here are some common questions related to seller concessions:
Can sellers refuse to contribute toward my closing costs? Sellers are not obligated to cover your closing costs. Any seller concessions must be negotiated within your contract.
Are seller concessions paid out of pocket? Seller concessions come from the seller's profits from the sale and are not paid directly by the seller.
Are seller concessions taxable? Seller concessions are considered sales expenses and are tax-deductible.
Is it better to ask for seller concessions or a lower sales price? The choice depends on your circumstances. If you aim for the lowest possible closing costs, then seller concessions are the preferred option.
How Seller Concessions Work - Conclusion
In conclusion, seller concessions can significantly impact your home purchase process, making it more affordable and appealing to both buyers and sellers. The extent of concessions is determined by various factors, including the type of loan you choose. When exploring the real estate market, understanding these factors and negotiating effectively can help you leverage seller concessions to fund your dream home.
To take your first step toward homeownership and explore financing options, start the approval process today with Classic Home Mortgage and let us help you fund your home dreams.