Seller Concessions for a Home Purchase

What Are Seller Concessions?

You might have come across the term “seller concessions” in your real estate journey, but do you fully understand what it entails? Seller concessions are benefits that sellers offer to buyers to help cover various costs associated with purchasing a home.

While the saying “there’s no such thing as a free lunch” generally holds true, seller concessions can make your home-buying experience a bit less expensive by reducing the amount you need to pay out-of-pocket at closing.

When buying a new home, your financial responsibilities extend beyond just the down payment. You’ll also need to account for closing costs and fees related to the mortgage. Seller concessions can ease some of these financial burdens by covering part or all of your closing costs.

How Seller Concessions Work

Seller concessions, or seller credits, are costs that the seller agrees to pay on behalf of the buyer. These concessions can be specified as either a fixed dollar amount or a percentage of the purchase price.

While sellers are not obligated to provide concessions, if they do, these must be clearly documented on the final Closing Disclosure. Typically, seller concessions cover costs like loan origination fees, points, inspection and repair expenses, or even prepaid real estate taxes.

Limits on Seller Concessions

There are limits to how much sellers can contribute in concessions, which depend on the type of mortgage and the size of your down payment. For instance, conventional loans usually cap seller concessions between 3-9%, while FHA loans typically allow around 6%. Generally, the more you put down, the higher the cap on seller concessions. These limits also apply to primary residences and second homes.

For non-owner-occupied properties, seller concessions are permissible but also have limits. Importantly, seller concessions cannot exceed your total closing costs.

Pros and Cons of Seller Concessions

Seller concessions can be a valuable way to reduce your out-of-pocket expenses and preserve more of your down payment. They can also help make your purchase viable if financing costs exceed your budget, preventing potential issues with closing.

However, seller concessions are not always guaranteed, especially in competitive markets where sellers might opt to consider other offers. Sometimes, negotiating a lower purchase price could be more advantageous than seeking seller concessions. Nonetheless, seller concessions are quite common, particularly for first-time homebuyers with limited funds.

To make the most of seller concessions, consult your CPA, and seek advice from your realtor and mortgage advisor. They can provide guidance tailored to your specific situation and help you navigate the process effectively.