What are Seller Concessions?

related category image

Point of Interest

Homebuyers can save on upfront fees by asking the seller to pay some or all of the closing costs during the negotiation process. Not every seller or market will be agreeable to that idea, though. 

When buying a home, there’s a lot to consider when negotiating with the seller. Not only do you want the property priced just right, but you also don’t want to pay too much in closing costs — which can be thousands of dollars.

Thankfully, as a buyer, you can ask for seller concessions, which take some of the burdens of the closing costs off of you. Knowing what a seller concession is can help you save money on your next home purchase.

What are seller concessions?

Seller concessions are portions of the closing costs the seller has agreed to pay for the buyer. Concessions help the buyer save money by reducing the amount they have to pay in out-of-pocket closing costs, which typically run from 3% to 6% of the home’s purchase price. For example, a 5% closing fee on a $200,000 home would come out to $10,000. The seller can agree to pay a percentage of that closing fee, reducing the buyer’s out-of-pocket cost and saving the buyer thousands of dollars.

Closing costs typically include the following fees:

  • Property tax
  • Home insurance
  • Title insurance
  • Recording fees
  • Attorney fees
  • Appraisal fees
  • Inspection fees

How do seller concessions work?

Seller concessions work by negotiating with the seller to help pay part of the closing costs. These negotiations often happen at the time of the offer, and buyers may ask for concessions if they have trouble covering closing costs or the home inspection revealed the property needs a lot of repairs.

The seller is never under any obligation to offer concessions and may choose how much (within limits) or how little to give. A buyer also needs to be aware of the type of housing market they’re in before asking. If the demand for housing is high and home offers are extremely competitive, there’s not much chance a seller will agree to these terms.

It’s best to be conservative when asking for concessions in a seller’s market because it may cause the seller to pass on a buyer’s offer, especially if they are competing with other buyers for the same property. But a seller may be more willing to agree to concessions in a buyer’s market when there aren’t many people interested in the property, or when a homeowner is desperate to sell the property.

Once a seller agrees to pay concessions, it does not mean the buyer gets cash back or a reduced down payment at closing. It means that the buyer pays less money in closing costs.

There are limits on how much of a percentage the seller can pay in concessions, and it depends on the buyer’s loan, down payment, and whether the home will be the buyer’s primary, secondary or investment property.

Here’s a quick breakdown of the different loans and seller concession limits:

  • VA loan: 4% max regardless of down payment
  • FHA loans: 6% max regardless of down payment
  • USDA loan: 6% max regardless of down payment
  • Conventional Fannie Mae loans
    • Primary residence & secondary homes (Loan-to-value ratio):
      • 90% LTV ratio is 3%
      • 75.1% — 90% LTV ratio is 6%
      • 75% or less LTV ratio is 9%
    • Investment properties (Combined loan-to-value ratio):
      • All CLTV ratios are 2%

Advantages of seller concessions

There are some advantages to getting the seller to agree to pay part of your closing costs. Most first-time homebuyers and those who need help coming up with the cash for closing costs will benefit from seller concessions because they reduce the amount of money they need to come up with at the time of closing. This can leave more money for other things, like the down payment, moving costs, HOA fees or other associated fees.

Some advantages of getting the seller to agree to concessions include:

  • Makes buying a home more affordable
  • Reduces buyer’s out-of-pocket closing costs
  • Allows the buyer to make a higher offer
  • Frees up money for home repairs or replacements found during the inspection

Disadvantages of seller concessions

While seller concessions sound attractive to buyers, there are some disadvantages that can come with it.

Some disadvantages of seller concessions include:

  • Concessions can get rolled into buyer’s mortgage loan, increasing monthly payments.
  • An offer with concessions might be less appealing in a seller’s market.
  • The seller may not have enough equity in the home they’re selling to cover the costs of a concession.

How to negotiate a seller concession

Having the seller pay for some of your out-of-pocket closing costs may sound like a straightforward process, but it’s a delicate balance that requires proper negotiation to keep your offer on the table.

This is why it’s always helpful to have an experienced realtor help you navigate the negotiations. A realtor will help you research the current local housing market to see what other buyers are asking for and what sellers are accepting. This will help you determine whether a property is worth purchasing or not — especially if you need to ask for seller concessions.

It’s also helpful to take your household budget into consideration. Use a mortgage calculator to calculate monthly costs and estimate the value of any potential concessions.

The best time to ask for seller concessions is when a property inspection reveals multiple repairs may be needed or you know the seller is having a hard time selling the home. 

The final word

Knowing what a seller concession is before going through the home buying process can help you plan out how much house you can afford, and it can help you save on costs when buying a home. Seller concessions are also appealing to sellers who are trying to close a deal. It’s best to work with a real estate agent who knows the local market and who can help you properly negotiate concessions for your next home purchase.