Demystifying Seller Concessions on a Conventional Loan

Seller concessions can make buying a home more affordable but how do they work with a conventional loan? As a prospective homebuyer understanding seller concessions for conventional loans is key to strategizing your offer. Let’s demystify what seller concessions are, how they work with conventional loans, and how to use them to your advantage.

What Are Seller Concessions?

Seller concessions refer to the seller agreeing to pay for some of the buyer’s closing costs. The seller essentially gives the buyer a credit toward closing costs, reducing the out-of-pocket expenses required at closing.

Seller concessions can include covering costs like

• Title fees
• Transfer taxes
• Prepaid escrow costs
• Loan origination fees
• Discount points
• Inspection fees
• Attorney fees
• Appraisal fees
• Interest rate buydowns

Seller concessions make the transaction more appealing to buyers by lowering their cash required to close. For sellers, offering concessions can help attract buyers and sell the home faster.

How Seller Concessions Work With Conventional Loans

When getting a conventional loan, the rules limit how much the seller can contribute in concessions. Conventional loans follow guidelines set by Fannie Mae and Freddie Mac.

The maximum seller concessions allowed depend on your down payment amount:

<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>

These percentages apply to the lesser of the sales price or appraised value.

For example:

• You purchase a home for $300,000 with 5% down.
• The home appraises for $290,000.
• With a down payment under 10%, the seller can contribute up to 3% of $290,000, equaling $8,700.

The seller concessions limits help prevent inflationary sales practices. Excessive contributions could incentivize buyers to pay a higher price, driving up sales prices artificially.

Applying Seller Concessions to Your Closing Costs

Seller concessions reduce your cash needed for closing. But how exactly do they get applied?

You’ll first receive a Loan Estimate from your lender with your estimated closing costs. This helps you see how much cash you need to bring to closing.

If the seller agrees to concessions, your lender will reduce your closing costs by the concession amount. This lowers the cash you owe at closing.

For example, let’s say your estimated closing costs are $15,000. The seller agrees to give you $5,000 in closing cost concessions. The lender will deduct the $5,000 concession from your closing costs, reducing what you owe to $10,000.

Now let’s say the seller agrees to $12,000 in concessions, but your closing costs are only $9,500. In this case, the most the seller can contribute is your actual closing cost amount of $9,500.

Excess seller concessions cannot be given to you in cash. But one option is applying excess concessions toward discount points to lower your interest rate.

Negotiating Seller Concessions

Securing seller concessions requires strategic negotiating. Here are some tips:

• Know the market. Review comparable sales to see if recent sellers offered concessions. This strengthens your position.

• Time it right. Negotiate concessions early, not as a last-minute request. Raise the possibility with your agent when making the initial offer.

• See it from their view. Consider if offering concessions will motivate the seller. If they need a quick sale, concessions could help.

• Have backup options. Be ready to offer compromises like increasing your down payment or purchase price if the seller won’t agree to concessions.

• Get help. Work closely with your agent to negotiate the best win-win outcome.

While not guaranteed, seller concessions can make a home purchase more feasible. Understand the guidelines for your loan type and leverage market factors to try to secure concessions.

Using Seller Concessions for Closing Costs vs. Down Payment

An advantage of seller concessions is they can lower your cash required for both closing costs and the down payment. But just how you apply them matters.

You can use seller concessions directly for closing costs like origination fees, inspection costs, or prepaid taxes. However, the concessions cannot go directly toward your down payment.

But they can indirectly help you qualify for a better loan and lower down payment. Here’s how it works:

• You have $15,000 in savings for a purchase.
• The loan requires a 10% down payment of $30,000.
• Closing costs will be around $8,000.
• The seller agrees to give $8,000 in closing cost concessions.
• By applying the concessions to your closing costs, you now only need $15,000 + $30,000 = $45,000 total cash to close.
• This allows you to qualify for the loan by freeing up more of your savings for the down payment.

So while concessions can’t go directly to your down payment, they can help reduce the total cash you need to close.

Common Mistakes to Avoid

When working with seller concessions, some common mistakes could jeopardize your loan:

• Asking for too much – Requesting excessive concessions over the allowed limits raises red flags. Remember, concessions can only pay your actual closing costs.

• Not disclosing – All concessions must be disclosed and documented. Undisclosed seller contributions could be considered mortgage fraud.

• Inflating the purchase price – Artificially inflating the purchase price to generate excess concessions is prohibited.

• Accepting cash back – The seller can’t give you cash back at closing from excess concessions.

Work closely with your lender and agent to ensure your concessions fall within guidelines.

Key Takeaways

Seller concessions can be instrumental in affording your dream home. Here are some key takeaways about seller concessions with conventional loans:

• Conventional loan guidelines limit concessions based on your down payment amount.

• Concessions lower your cash required at closing by reducing closing costs.

• Time your request right, know the market dynamics, and negotiate wisely.

• Concessions can help indirectly lower your down payment amount.

• Avoid mistakes like concealed concessions or inflating the purchase price.

With the right approach, seller concessions provide a legal and strategic way to reduce expenses in a home purchase. Understand the guidelines well so you can maximize their value in your transaction. Partner with a trusted lender and agent to navigate the intricacies.

Seller concessions on a conventional loan can unlock homeownership. Now that you understand the dynamics, you can determine if they are right for your next purchase.