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What Are Seller’s Concessions and How Do They Work?

Buying a home can stretch your finances to the limit, especially with closing costs that could be as much as 5% of the purchase price. But, there is a possible way to have the seller help with these closing costs.

These are known as seller concessions (or a seller assist), and they could save you thousands when buying a new home. The amount the seller can contribute to closing costs will vary depending on the type of loan a buyer is using. Let’s take a deeper look at closing costs and seller’s concessions. 

What are closing costs?

Closing costs are expenses that either the buyer or seller will pay in addition to the home’s purchase price. Some of these costs include:

  • Origination fees
  • Title searches
  • Title insurance
  • Appraisal fees
  • Property survey
  • Deed recording fees
  • Credit report fees

What are seller concessions?

Seller concessions (also known as seller assists) are when the owner of the home agrees to pay some of the buyer’s closing costs. This could be because you’ve asked them to pay a particular fee or they could just pay a percentage of the entire closing costs.

In a buyer’s market, home buyers are more apt to be successful at getting a credit from the seller. In a seller’s market, buyers are often discouraged from asking for any seller assistance. Bidding wars are often prevalent in seller’s markets, meaning that asking for credits could put your offer at the bottom of the seller’s list. 

What fees could a seller’s concession pay for?

There are many different fees that make up your closing costs, and the seller can contribute to some or all of them. 

  • Inspection fees could include the cost of the home inspection or other types if required. 
  • Title insurance protects the lender should the ownership of the property later become disputed. 
  • Property taxes will be due at closing and will need to cover the rest of the year. 
  • Appraisal costs if the lender requires an appraisal to assess the property’s value to check that they aren’t lending more than the home is worth. 

You’ll be given an idea of your closing costs when you apply for a loan, because they are required to give you a loan estimate that will show you how much money you will be spending on closing day.

The advantages & disadvantages

The benefits of concessions are clear – they allow you to save money on your closing costs. And, it benefits the seller because it can ensure that their home gets sold. Sellers can be eager to have a swift closing, especially if their home has been on the market for a while. 

But, as a buyer, asking for concessions from the seller can have some negatives. The seller might not be willing to pay for some of the buyer’s fees or they may not want to take on the extra cost. In situations where a seller has multiple offers, the seller might reject offers with concessions attached very quickly. And, there are limits on concessions. 

Limits on concessions

The amount of seller concessions is dictated by the buyer’s loan program. Even if the seller is willing, they cannot contribute all of your closing costs. There are different levels of contributions allowed depending on the type of home loan you are applying for. 

This is to prevent inflation in the market. HUD and Fannie Mae set the rules to avoid adding more upward pressure in the housing market. Otherwise, sellers could give larger contributions to buyers to make it easier for them to buy in exchange for a higher purchase price. While this could help many people purchase, it would also push up housing prices. 

Since previous sales data is used to value homes, this would increase inflation in the maket. And, it would also increase rental prices – so the whole market situation would spiral out of control without these restrictions.

Contribution limits by mortgage types

Depending on the type of home loan the buyer is using, the limit will vary. 

  • Conventional Loans: Limits for these loans change depending on the buyer’s down payment amount, apart from when someone is buying an investment property. Investors can only accept concessions of 2% regardless of the down payment. With a down payment below 10%, the seller is limited to 3%. If the buyer is putting down between 10% – 25%, the seller has the option of contributing as much as 6%.
  • FHA Loans: With these loans, the seller contribution has a maximum of 6%, no matter what the buyer’s down payment or other factors are. 
  • VA Loans: Seller’s are limited to 4% with VA loans. But, these contributions can go towards things other than the normal closing costs. 
  • USDA Loans: These are a little different. There’s a 6% limit on contributions, but instead of using the sale price or the appraiser’s valuation, the mortgage lender uses the loan amount. 

Ready to get started?

Enlist the help of a real estate agent to guide you through the process and make sure that you are in the best position possible. 

Team Melton has over 50 combined years of real estate experience to assist you through every step of the process. Contact us today to get started on selling your home!

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