Whether buying a new home or selling one, associated fees come with it. For example, buyers typically pay loan fees on the mortgage, and the seller pays the real estate agent’s commissions and property transfer costs.
It can be pretty jarring for first-time home buyers to realize that the cost of buying a home is often more than just the purchase price. In addition to a down payment, you’ll need to pay closing costs, appraisal and inspection fees, title insurance, mortgage insurance, property insurance, and, if the inspection shows damages, the cost of repairs. These can all add up to a substantial amount, typically between 3% and 6% of the home value.
What if you haven’t set aside the cash for these expenses? Are they negotiable? If you don’t come up with them quickly, could you lose the deal on the home?
Selling concessions could be the answer if you find yourself in this situation during the home-buying process. Let’s talk about seller concessions and how you can make them work for you.
What are seller concessions?
Seller concessions are closing costs that the seller has agreed to pay. There are closing costs in any real estate transaction before the property exchanges hands. Typically, the buyer fronts up the cash for these costs, but sometimes the seller may agree to pay a portion. That portion is referred to as seller concessions.
Seller concessions are an excellent way to save on closing costs for the buyer, sweeten the deal, and close quickly for the seller. They’re relatively common in real estate transactions, though they’re far more likely to occur in a buyer’s market.
How do seller concessions work?
Seller concessions are typically negotiated as part of the buyer’s offer on the home purchase. For example, they can be requested upfront or later to cover repairs or damages that a home inspection has uncovered. For instance, a buyer could ask for a concession if they feel the house is priced above market rate or know they’ll have trouble covering the closing costs when making the offer. Alternatively, if the home inspection has shown no significant issues, but the buyer can already see that the house will need some repairs, they can ask for seller concessions to cover those repairs. This typically includes necessary fixes and not cosmetic upgrades.
Seller concessions can be received on all types of home loans, including FHA, VA, or USDA. However, there are rules that limit the maximum amount within each loan type. Once the seller agrees to the concessions, the funds come out of the proceeds of the sale; that is, the seller is not required to come up with the cash. Remember that potential buyers can’t ask sellers for concessions exceeding closing costs.
What do seller concessions cover?
The seller can cover part or all of the following closing costs:
- Property taxes: Pre-paid property taxes through the end of the year at closing.
- Appraisal fees: The cost of getting the home appraised by a licensed third party to determine its current market value.
- Title insurance: Title insurance protects the mortgage lender against title claims against the home.
- Loan origination fees: The lender’s cost of processing the buyer’s loan.
- Inspection fees: The cost of having a home inspection for the loan. In some states, a property must be evaluated by a pest inspector before the sale can be finalized.
- Attorney’s fees: If a real estate attorney has been hired to review closing documents, those fees are also part of the buyer’s closing costs.
- Mortgage points: Also known as discount points, this is an optional fee or interest paid upfront by borrowers in exchange for a lower interest rate.
- Recording fees: The cost to record the home purchase with the local government.
- Repairs: If repairs or damages are uncovered during a home inspection, the seller can offer a concession to offset potential or known repair costs.
Pros and cons of seller concessions
There are several advantages of seller concessions, especially for a buyer. But for both buyers and sellers, it’s essential to consider the pros and cons before you agree to seller concessions. Here are some things to think about.
Pros of seller concessions
Getting someone else to foot the bill for some out-of-pocket costs is a big pro if you’re purchasing a property. This allows you to pay less at closing and save up to a few thousand dollars, making the deal more affordable. If a home sale includes seller contributions, you can put in a higher offer. While technically, this doesn’t make any difference in your bank balance, a higher offer can allow you to stand out and, hopefully, get accepted.
For sellers, agreeing to concessions can be a good idea if the home has been sitting on the market for a long time or isn’t seller-friendly. Seller concessions can sweeten the deal for a buyer and get more offers for a home in a crowded market, allowing the home to sell more quickly.
Cons of seller concessions
While there’s a significant benefit to getting a seller concession, buyers should be warned that a seller’s concession is often rolled into the sales price of the home, which would lead to a more expensive mortgage loan and, therefore, more interest. From the seller’s perspective, it can also make you a less attractive buyer than someone who doesn’t ask for a seller’s concession. This is especially true in a seller’s market, where your offer could be declined if the seller has many options.
For the seller, the con is simply less money on the table that could eat into the home sale profits. This is particularly true if a seller is selling this home to purchase a different property and has closing costs and expenses of their own.
Negotiating seller concessions
Knowing how to get the best deal as a home buyer is primarily about understanding the market you’re in and knowing what is most vital for you to get. Here’s how to negotiate seller concessions, so everyone gets the best deal possible.
Know whether you’re in a buyer’s or a seller’s market
A buyer’s market is when there are a large number of homes available that sellers are willing, sometimes desperate, to sell. Conversely, a seller’s market is when there is a limited supply of available homes and more buyers to purchase them. Suppose you’re in a buyer’s market. In that case, you have far more negotiating power because by sweetening the deal for you, a seller could sell their home more easily and quickly than they would have without it. However, you’re unlikely to get the same deals in a seller’s market.
Work with a real estate agent
Unless you’re a pro, consider working with a realtor or real estate agent who can give you information about the real estate market, local sales, and the regional housing market. They’ll also be able to provide you with information about other similar properties in the area that have sold with concessions. This information can be helpful when negotiating with the seller and make them more amenable to contribute to your closing costs.
Know what’s most important
The key to good negotiating is knowing the things you want and the areas where you might have more wiggle room. By prioritizing and detailing precisely what you want the seller to cover, you’re much more likely to get it.
Seller concession limits
Remember, the total amount of seller concessions cannot exceed your total closing costs. In addition, how much a seller can pay in closing costs often depends on the type of loan you’re getting, the size of the down payment, the type of property, and other factors.
The reason for these limits being put in place by Fannie Mae (The Federal National Mortgage Association) and HUD (The U.S. Department of Housing and Urban Development) is to discourage inflation in the housing market. Here are the contribution limits by mortgage type:
The rules for conventional loans are set by Fannie Mae and Freddie Mac, which have a maximum cap based on home price and down payment amount.
For purchasing a primary home, if your down payment is less than 10%, the seller can contribute up to 3% of the loan amount. For a down payment of 10-25%, the seller can contribute up to 6%, and for more than a 25% down payment, the seller can contribute up to 9%. For investment properties, the seller concessions are capped at 2% regardless of purchase price or down payment.
For all FHA (Federal Housing Administration) loans, the seller can contribute up to 6%.
A VA loan is a mortgage loan that is guaranteed by the United States Department of Veterans Affairs. According to VA rules, the seller can contribute up to 4%, and the seller concessions on VA loans can include the following:
- Payment of the buyer’s VA funding fee.
- Prepayment of property taxes and homeowners insurance.
- Gifts, for example, a television or a dishwasher.
- Payments for credit balances or judgments on behalf of the buyer.
Like conventional loans, United States Department of Agriculture (USDA) loans also cap seller concessions at 6% of the loan amount.
Seller concessions can benefit both the home buyer and the home seller, helping the buyer keep costs down while allowing the seller to complete the transaction quickly, especially in a slow market. Even though there can be downsides to seller concessions, they’re an option worth having in your back pocket.
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