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What Are Seller Concessions & How Do They Work?

Seller concessions, sometimes referred to as seller contributions, are made during the purchase of a home. They are agreements between a buyer and seller about who will cover certain costs, including closing costs or last-minute repairs on the house. Closing fees usually cost buyers between two and five percent of the total home price. So, oftentimes, home buyers will ask the sellers to help cover some of these costs:

  • Property taxes
  • Title insurance
  • Loan origination fees
  • Inspection fees
  • Recording fees
  • Appraisal fees
  • Repairs

What Are Seller Concessions?

Seller concessions are helpful for buyers struggling to pay all the closing costs. It is not a reduction in price, but rather part of negotiations. Typically, a buyer will approach the seller after a buy-sell agreement has been signed, asking the seller to include a concession in their agreement.

Seller concessions help buyers save money by allowing the seller to cover some of the closing fees or costs for repairs. Rarely does a seller concession lead to a price reduction in the home, it is just a way for the buyer and seller to negotiate who will pay certain closing costs, or who will cover repairs needed on the house.

How Do Seller Concessions Work?

A seller concession is like an addendum to the original buy-sell agreement. They may cover closing fees or deficiencies in the property. Seller concessions concerning the condition of the property are usually made after an inspection on the house, during the due diligence process. If an inspector finds defects in the home, the prospective buyers will request a seller concession; whereas, the seller must then fix the property or, in some cases, reduce the price of the home.

For example, a buyer may sign a buy-sell agreement only to discover that the roof needs replacing. Their realtor will come back to the seller and attempt to form a concession. Either the seller can replace the roof or they will have to take a sum off the total price of the house. It is up to the seller whether or not to concede. Then, the buyer can back out of the agreement, if needed.

Are Seller Concessions Common?

Yes, seller concessions are common, but it also depends on the local housing market. They happen more frequently in a buyer’s market because sellers are competing for a limited amount of buyers. So, the buyers have more leverage to make certain requests. Seller concessions are also more common among first time home buyers.

Typically, first time home buyers are strapped for cash because of the down-payment, moving expenses, and lending fees. They are more likely to ask the seller to cover some of the closing costs.

In a seller’s market, where inventory is low and buyers are competing for housing, seller concessions are less likely. However, even in a seller’s market, seller concessions may still help buyers reduce their closing costs. If a buyer foresees that they will need help covering closing costs, they may offer a higher amount than the seller is asking. Then, the seller can pay the closing fees and the buyer will simply increase their loan amount.

Typical scenarios when seller concessions are made:

  • The buyers have limited funds for closing and need assistance.
  • When the property inspection reveals that the house has damages needing repair.
  • If the appraiser comes back with a value less than the asking price.
  • The seller is having a difficult time selling the property.

Limits To Sellers Concessions By Loan Type

There are limits to seller concessions. Mortgage companies like Fannie Mae and HUD set limits on seller concessions to discourage inflation in the housing market. For example, if a seller agrees to give the buyer $20,000 for closing costs, but the closing costs are only $12,000, then the extra $8,000 is pocketed by the new buyers. But the sale price of the home still remains the same, on paper. To avoid this, sellers are only allowed to contribute a small percentage of their home's value to closing costs.

Conventional Loans

Fannie Mae and Freddie Mac are the two rule makers for conventional loans, setting maximum limits on seller-paid closing costs. Although seller-paid cost amounts are capped, the limits are very generous, typically 6% of the house’s total selling price. Which is much more than most sellers are willing to contribute to closing costs.

VA Loans

For VA Loans, a seller may contribute up to 4% of the sale price. Seller concessions may go beyond the typical closing costs associated with obtaining a mortgage. Types of seller concessions may include: prepaying taxes on the home; paying the buyer's VA funding fee;
paying off judgements or credit balances on the buyer's behalf, or purchasing gifts, such as a microwave or dishwasher.

FHA Loans

Currently, the FHA limits seller concessions to 6% of the sale price. It's not illegal for the seller to contribute more than six percent, but according to FHA loan rules, doing so results in a lowering of the sale price for purposes of calculating the FHA loan amount, dollar for dollar on all money contributed that exceeds the six percent limit.

USDA Loans

USDA allows sellers to pay for all of a buyer’s loan-related closing costs. In addition, they can contribute up to 6 percent of the loan amount in what are known as “concessions” to cover expenses like prepaid taxes and insurance.

Benefits & Drawbacks Of Seller Concessions

The advantages and disadvantages of seller concessions depend on which side of the fence you’re on—selling or buying. Seller concessions are especially helpful for first time buyers who don’t have enough cash to pay closing costs. But, concessions also help protect all home buyers, in the case of essential home repairs and such.

Drawbacks of seller concessions are primarily for the seller; whereas, they must negotiate their original terms. However, concessions can also benefit sellers by finding the right buyers who are willing to work with more “run down,” outdated homes. Either way, it’s best to work with your realtor and lender when discussing any seller concessions, to ensure that nobody crosses the red tape regulations of the home buying / selling process.

 

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This page last updated: March 21, 2022