Closing costs can be a huge, unexpected expense when purchasing a home. Think $8,000 to $10,000 or more on a typical purchase.
But current mortgage rules allow sellers and other parties to pay all or part of your closing costs.
Buying a home is an exciting milestone. But between the down payment and closing costs, it can also be an expensive prospect for first-time homebuyers. On a $200,000 home, you may pay over $15,000 in upfront costs. Coming up with such a large amount of cash is difficult for many buyers. This is where seller concessions can make homeownership more affordable.
Seller concessions, also known as seller credits, are closing costs paid by the seller. Read on to learn how seller concessions work with conventional loans, how much sellers can contribute, and tips for maximizing your savings.
What Are Seller Concessions?
Seller concessions provide an incentive for home buyers by lowering their out-of-pocket costs The seller agrees to pay a certain dollar amount or percentage toward allowable closing expenses This can include
- Title insurance fees
- Lender fees
- Recording fees
- Transfer taxes
- Prepaid homeowners insurance premiums
- Prorated property taxes
- Appraisal and inspection fees
- Loan discount points
The buyer then pays less at closing, making the home more affordable. Seller concessions help the seller market their home and can give buyers much-needed savings.
Seller Concession Limits On Conventional Loans
The maximum seller concessions depend on the loan program, down payment amount, and occupancy type. For conventional loans backed by Fannie Mae and Freddie Mac, the limits are
<ul><li><div>If your down payment is less than 10%, the seller can contribute up to 3%.</div></li><li><div>If your down payment is 10% – 25%, the seller can contribute up to 6%.</div></li><li><div>If your down payment is more than 25%, the seller can contribute up to 9%.</div></li> </ul>
So on a $200,000 purchase with 5% down, the seller could pay up to $6,000 of the closing costs. With 20% down, they could pay up to $12,000.
The limits also depend on whether it is your primary home, second home or investment property:
- Primary residence: 3-9% based on down payment
- Second home: 3-9% based on down payment
- Investment property: 2% maximum contribution
Conventional loans let sellers contribute more than FHA and VA loans, which cap contributions at 6% and 4% of the purchase price respectively.
How Seller Concessions Help Buyers
Closing costs often come as an unwelcome surprise to first-time buyers. On a $200,000 home, you may pay:
- $4,000 in lender origination charges
- $2,500 for an appraisal and inspections
- $1,200 in title insurance fees
- $3,000 down payment
- $1,500 prepaid property taxes and insurance
- $3,000 in other taxes, recording fees and legal charges
That’s $15,200 due at closing! Coming up with such a large amount can prevent many buyers from purchasing a home. This is where seller concessions make homeownership achievable.
For example, let’s say the seller agrees to credit you 6% toward closing costs on your $200,000 home. That’s $12,000 credited that you don’t have to pay out of pocket. With the seller picking up most closing expenses, you only need $3,200 to close.
Seller concessions reduce the cash needed upfront to buy a house. This helps first-time buyers and those with limited savings.
Tips For Getting The Maximum Seller Concessions
The maximum allowable seller concessions depend on your loan program, down payment, and property type. But just because sellers can pay 6% or more doesn’t mean they will agree to it. Here are tips for negotiating the highest concessions possible:
Check comparable sales – Your real estate agent can provide data on recent sales with seller contributions. This information strengthens your case for getting help with closing costs.
Make your offer more appealing – Offering full price or agreeing to other seller requests may make them more likely to cover closing costs.
Ask early in the process – Seller concessions should be negotiated upfront, not at closing. Add the request to your initial offer.
Agree to pay anything above the limit – If the seller offers $14,000 and your limit is $12,000, agree to pay the extra $2,000 yourself.
Get quotes for closing fees – Total quotes from vendors prove to the seller how much you need. This makes it more likely they’ll agree to cover those costs.
Compromise on repairs – Offer to take a credit instead of the seller making repairs. This can provide you with funds needed to cover closing expenses.
Hire an experienced real estate agent – A knowledgeable agent knows the best strategies for your market when negotiating concessions.
Benefits Of Maxing Out Seller Concessions
While any amount of seller help reduces your cash outlay, getting the highest allowable concession provides maximum savings.
On a $200,000 home purchase here are the benefits of maxing out seller credits:
Down payment remains intact – Keep your down payment savings untouched by using seller funds for closing costs.
Avoid draining your reserves – Closing often taps into funds saved for emergencies and other goals. Seller credits mean not depleting these reserves.
Pay down debts faster – Money you would have spent on closing costs can go toward paying down student loans, credit cards or other debts.
Make impulse upgrades – Use the extra money at closing to upgrade flooring, fixtures and appliances as you move in.
Invest back into the home – Take the savings and use it to fund home improvements in the months after moving in.
Splurge on moving expenses – Pay for movers, new furnishings and decorating using the money saved at closing.
Bottom Line
Seller concessions make homeownership more affordable by reducing upfront cash requirements. Conventional loans allow generous contributions from sellers of up to 9% of the purchase price. This funding can significantly lower your closing costs.
Maximizing concessions involves negotiating upfront, getting closing cost estimates early, hiring an experienced real estate agent, and being flexible on other offer terms. While any amount of seller credits helps, pushing for the maximum allowable contribution provides the greatest savings.
If you’re buying a home, make seller concessions part of your offer strategy. The savings can help you achieve the dream of homeownership.
Conventional Loan Seller Concession Maximums
Seller concessions, also known as seller-paid closing costs or seller credits, are grouped in with other types of closing assistance called Interested Party Contributions, or IPCs.
IPCs are any funds issued to the buyer from a party that stands to gain from the transaction:
- Seller
- Builder
- Developer
- Real estate agent
- An organization with co-ownership of any of the above
Interestingly, the lender is not considered an interested party and may give you a closing cost credit from its profit margin without affecting IPC maximums.
Total seller concessions plus any other IPCs must not exceed the following:
|
Down Payment |
Primary Residence IPC |
Second Home IPC |
Investment Property IPC |
|
3-9.99% |
3% |
3% |
2% |
|
10-24.99% |
6% |
6% |
2% |
|
25%+ |
9% |
9% |
2% |
The above percentages are based on the home price. For example, you could receive up to $9,000 (3%) in seller concessions for a $300,000 home, assuming its your primary residence.
Keep in mind that the above only applies to conventional loans underwritten by Fannie Mae and Freddie Mac rules.
Other maximum seller concessions are as follows.
- FHA: 6%
- VA loans: All normal closing costs plus an additional 4%
- USDA loans: 6%
If for some reason you receive more seller concessions than conventional loans allow, you might consider changing a different loan type.
What Seller Concessions Can Be Used For
You can use seller concessions and other IPCs toward:
- Loan closing costs like title, escrow, and appraisal charges
- Items the lender requires you to prepay like property taxes and homeowner’s insurance
- Loan origination points
- Discount points
- Up to 12 months of HOA dues
- Most other costs of getting a mortgage
A gift from a relative who is also the seller, such as with a
Lenders do not allow you to use interested party contributions toward your down payment, financial reserves, or to meet minimum contribution rules for the loan. You also may not receive cash back at closing unless it’s a refund of your earnest money.
However, IPCs can indirectly help you qualify for the loan. For example, you have $10,000 in savings. The down payment requirement is $9,000 and closing costs are another $9,000, for a total of $18,000 required to close. A seller credit of $9,000 would lower your cash requirement enough to qualify.
Beware of contributions that are not disclosed to the lender. One extreme example is if the seller “accidentally” leaves a 1966 Ford Mustang in the garage when he moves out as an added bonus for buying the home. In reality, it’s an undisclosed contribution that could make the loan due and payable.
Other examples are undisclosed second mortgages from the seller, covering moving expenses, or any other item of value meant to entice you to buy the home. It’s best to steer clear of these offers.
What are Seller Concessions, What are the Max Concessions on Conventional loan, FHA, VA, USDA
FAQ
What are the most seller concessions for a conventional loan?
Can seller concessions be used for down payment conventionally?
How does a conventional loan affect the seller?
Is a seller’s concession a good idea?
What is a seller concession on a conventional loan?
A ‘seller concession’ refers to any arrangement where closing costs on a home purchase are paid by the seller rather than the buyer. What is the maximum seller concession on a conventional loan? If your down payment is less than 10%, the maximum seller contribution is 3%.
What are buyer and seller concessions in real estate?
In real estate, **concessions** refer to benefits or discounts offered by either the buyer or seller to facilitate the sale of a home and close the deal.These concessions are typically negotiated during
What are FHA seller concessions?
FHA seller concessions have similar rules to conventional loans. For all FHA loans, the seller and other interested parties can contribute up to 6% of the sales price or toward closing costs, prepaid expenses, discount points, and other financing concessions.
What is a seller concession limit on a home loan?
Here are some common types of loans and their associated seller concession limits: Seller concession limits for conventional loans typically range from 3% to 6% of the home’s purchase price. However, the limit varies based on factors such as the buyer’s down payment and the loan-to-value ratio.