Seller Concessions: What are they and how do they affect closing?
Seller concessions are what they sound like: things the seller is giving to the buyer during the sale. Nobody wants to pay more than they have to at the closing table, and negotiating seller concessions can help a buyer cover some closing costs.
Each closing cost typically has either the seller, the buyer or both parties. Eager sellers might be willing to take on some of the buyer's costs to speed things along or in exchange for leaving some home inspection items for the buyer to take care of.
What are seller concessions?
With any real estate purchase, both the buyer and seller are responsible for paying certain closing costs. Even though there are certain expenses that one party will usually pay for, there’s always room for negotiation.
Seller concession definition
Seller concessions are closing costs the seller agrees to pay for the buyer. They’re considered concessions because sellers cover costs that buyers normally pay themselves. The seller also gets something in return — a specific closing date, a leaseback agreement, waived contingencies, overlooking necessary repairs — just about anything, really.
Capitalizing on seller concessions can be a good way for homebuyers to minimize the upfront cost of buying a house. Closing costs can add thousands of dollars to the total amount you owe before the property can change hands. As such, it’s often in your best interest to try to get the seller to play ball and foot some of the bill themselves.
How do seller concessions work?
If this is your first time buying a house, you might envision the following scene at the closing table: You and the seller sitting on opposite ends of the table (flanked by your respective real estate attorneys, of course), running through each expense and negotiating back and forth over who pays for what.
That’s not really how it works in the real world, though. For the most part, any concessions are negotiated early on in the transaction as part of the purchase agreement and then incorporated into the underwriting decision. There may be some cases where the seller wants to change some aspect of the agreement or the buyer discovers an issue with the house that requires additional compensation, but those instances are exceptions rather than the norm. And ever since the COVID-19 pandemic started, title companies have been restricting how many people attend closings, so you and the seller may never cross paths at all.
With that in mind, if you want to negotiate seller concessions, you’ll have to bring them up earlier in the mortgage process. You might even ask for them when submitting your purchase offer. If the asking price seems pretty high, especially compared with the rest of the market, you might have some luck getting the seller to cover certain closing costs in lieu of a price drop. The longer a house has been sitting on the market, the more open the seller will probably be to paying a little extra on the closing costs.
The home inspection is another potential gold mine when it comes to seller concessions. Every house is going to have defects — some more than others — and any issues that come up in an inspection can be used in negotiations. Seller concessions for repairs are some of the most common examples you might run into. From the seller’s perspective, it may be worth paying extra closing costs rather than pony up money for expensive repairs (not to mention scheduling that work) before the closing date.
However, in an overheated seller’s market, the opposite is frequently occurring: Buyers may waive their right to an inspection altogether. That’s an unwise move, to say the least. As you formulate an overall negotiation strategy, make sure you don’t relent on inspections. You may regret the decision to waive contingencies if you discover that expensive repair work is needed after the fact.
Another point to keep in mind when negotiating concessions is that the seller doesn’t necessarily need to cover the entire expense. You can always ask that they pay a larger share of the transfer taxes and other government fees, for instance. However, there are limits on how much a seller can pay as a concession, and they vary depending on the loan type. But we’ll get to that later.
Buyer vs. seller: Who pays the closing costs?
There are certain closing costs that both parties will have to pay — attorney fees, for instance. Other expenses will only apply to the buyer, like loan origination, credit report and appraisal fees. And then there are some, like real estate agent commissions, that the seller alone will cover. Your closing disclosure will list every closing cost and show you who is responsible for paying each expense.
What closing costs do sellers pay? We’ve broken down some of the most common fees that each side needs to cover:
Chain of title
Lender’s title insurance
Owner’s title insurance
Water certification fee
Government recording fee
Prepaid homeowners insurance
Real estate commission
Property tax installments outstanding (due and payable)
Seller concessions usually cover some or all of these closing costs
Looking at that table above, which of those items are the best candidates for seller concessions? Assuming they agree to make any contributions, sellers will often assist with these closing costs:
Sellers may also opt to contribute to your mortgage points. This is actually the common sales and financing concession used in real estate transactions. If the seller agrees, they’ll typically pay up to 1% in discount points.
As a reminder, you can buy mortgage points to reduce your interest rate, which will lower your monthly housing costs as well as the total amount owed on your home loan. So, there are some long-term benefits to buying down the rate compared with some of the seller contributions listed above.
Another popular seller concession — at least before the housing market crunch — is a temporary buydown. Whereas buying down the rate impacts the entire life of the loan, a temporary buydown only affects an initial loan period. The most common example you may encounter is a 2-1 temporary buydown, which would lower your interest rate 1 percentage point — say, from 4% to 3% — for the first two years of your mortgage.
FHA seller concessions and other loan types
As we mentioned earlier, there are limits on how much sellers can pay toward your closing costs. Why the cap? Excessive seller discounts could indicate that the house’s market value is significantly less than the purchase price. And that would mean lenders are taking on more risk by extending a home loan under those conditions.
Other rules and regulations may also be in effect across different types of home loans:
- FHA seller concessions
- VA loan seller concessions
- Conventional loan seller concessions
FHA seller concessions
If you’re using an FHA loan, you should be aware that the Federal Housing Administration caps seller concessions at 6% of the sale price. That’s nothing to sneeze at, though. Let’s say the asking price on the home is $400,000. In that case, the seller would not be able to contribute more than $24,000 to your closing costs.
Also keep in mind that the FHA will not allow seller concessions to be paid toward your down payment. You’ll have to apply any extra funds the seller provides to other closing costs.
VA loan seller concessions
Compared with FHA loans, VA loans are a bit more restrictive when it comes to seller concessions. The Department of Veterans Affairs limits seller contributions to 4% of the sale price vs. 6% with an FHA home loan.
Another slight difference involves the type of closing cost sellers can pay. Although VA loans do not have loan origination fees, they do have VA funding fees. And it’s perfectly fine for seller concessions to cover that particular expense.
Conventional loan seller concessions
Conventional loans operate a little bit differently when it comes to seller concessions. Rather than follow seller concession limits set by government institutions, they must adhere to the rules created by Fannie Mae and Freddie Mac.
Those rules are more complicated than either VA or FHA options because concession caps change depending on the size of the down payment. Your limit could vary anywhere from 3% to 9% on a residential purchase.
Conventional loan seller concession limits
- Down payments under 10%: 3%
- Down payments between 10% and 25%: 6%
- Down payments more than 25%: 9%
As you can see, Fannie and Freddie allow for higher seller contributions when you put down more money as a down payment. Again, it’s worth reiterating that limits are in place to protect lenders against risk. A bigger down payment means less risk, which leads to more seller contribution options.
Seller concession negotiating tips
Bringing a seller to the bargaining table isn’t always easy, let alone getting them to agree to seller concessions. But if you want the best chance to knock some money off of your closing costs, follow these negotiation tips:
- Be realistic: Asking the seller to pay up to the concession limit for your loan type could backfire if the house is properly priced and in good shape structurally. You could even cause them to walk away from the deal if your request is too unreasonable, so come to the table with realistic expectations.
- Provide evidence: Home inspection and appraisal reports should document any concerns regarding the market value of the house or major repair work that needs to be done. Go the extra step and get quotes from contractors to show the seller the cost to fix any defects with the house. That way, you’ll have a dollar figure to negotiate toward that’s based on hard data.
- Play to the housing market: Trying to negotiate concessions in a seller’s market won’t get you very far. The seller could have multiple offers on the table, and yours could be easily rejected if you ask for concessions. You’ll have a lot more bargaining power if the housing market has cooled down — even more so if the house has sat on the market for a long time.
- Keep it simple: Don’t bombard the seller with a list of demands. Choose one or two items that you feel are reasonable requests and make your case for them. That way, the seller will be more likely to pay extra on your closing costs.
- Consult experts: Talk to your real estate agent to see what concessions they think the seller will make. Your agent should already be in contact with the seller’s listing agent, so they might have a good read on the seller’s mindset and their openness to concessions.
Seller concessions cover some of the closing costs that buyers would otherwise need to pay out of pocket. They can be mutually beneficial, helping buyers overcome financial hurdles and pushing the deal forward past any unexpected obstacles. With a little negotiation and willingness to compromise, both parties can score a win and walk away from the transaction feeling satisfied.
Negotiating seller contributions can be tricky, though, especially in a red-hot housing market. It’s always a good idea to talk to your own team of experts before making any requests. Your real estate agent, loan officer and real estate attorney have likely dealt with seller concessions on numerous occasions. They can tell you when to push for more and when to back off.
Purchase negotiations can be a delicate process, and you don’t want to scare off the seller if you have your heart set on a home. Listen to the professionals and follow their advice.
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