What are seller concessions and how do they work?
Understand concessions before requesting them
- Sellers are less likely to agree to concessions in a seller’s market.
- Buyers can finance their closing costs into their mortgage loan by asking for concessions.
- Unless the seller lowers the asking price, closing cost concessions are added to the asking price.
- Concessions can be 2 percent to 9 percent of the asking price, depending on the loan program.
In broad terms, seller concessions are anything agreed upon in writing that the home seller is willing to do or pay for to help close the deal on a house with a buyer. Concessions can include paying for repairs required in the inspection report, purchasing a home warranty for the buyer, moving the closing date or even helping to pay for closing costs.
Getting sellers to agree to concessions can be tough in a seller’s market where buyers who are looking for concessions are competing against other buyers who do not need them to close on the house. Sellers are more likely to accept an offer that has no concessions over an offer that asks them to pay closing costs — the most common concession — even though that type of concession generally doesn’t cost the sellers any money at closing.
This may sound confusing, and it is. Here is how closing-cost concessions work. Say you are a first-time homebuyer and have enough money saved for a down payment, but not enough to cover the closing costs, which can include application, home inspection, appraisal, title search, and even loan origination fees. You can ask the seller to pay some or all of these fees, but unless you also get the seller to lower the price of the house by the same amount, these fees are added to the total amount financed through the mortgage.
Closing-cost concessions actually are just a legal way to finance the closing costs into your mortgage. Depending on the type of mortgage you get, these concessions can be anywhere from 2 percent to 9 percent of the cost of the home. For example, on a low-down-payment Federal Housing Administration (FHA) loan, you can finance as much as 6 percent of the sales price as seller concessions to help pay for closing costs.
So, if you are buying a $100,000 property, the mortgage loan could finance as much as $106,000. The sellers still get their $100,000 asking price, while the closing costs come out of the other $6,000. The buyer gets to bring less money to the closing table, but ends up paying interest on the extra $6,000 over the life of the loan.
Note, that if the actual closing costs only come to $4,000, the seller gets the other $2,000 — which means the buyer actually pays more than the asking price — unless the buyer makes sure this extra amount gets applied to other costs, such as purchasing a home warranty, prepaying interest, or buying down the interest rate. Talk with your mortgage professional to make sure you do not ask for more concessions than you will need.
Pros and cons
Seller concessions can help first-time homebuyers or buyers who are moving into a more expensive market purchase a home they otherwise would not be able to afford because it lowers the amount of money they must pay at closing. The downside, however, is that these buyers actually pay more for the home than the original sales price, and they could pay interest on that extra amount for years.
There can be another problem with concessions — if the property does not appraise for the increased cost the loan application could end up being rejected. Some loan programs and/or state laws also may not allow buyers to pay more than the listed price on a home, so unless the seller also agrees to lower the asking price, concessions may not even be allowed. As with any other financial decision you make, if you are uncertain about how concessions work, ask your lawyer or mortgage professional for a complete explanation.