If you’re buying a home, you may be focusing on the price tag of the property, but there are other costs that can amass quickly and cut into what you can ultimately afford. Some buyers may have luck negotiating seller concessions to help pay these costs upfront. Here’s what concessions are, and how that strategy can work.
What are seller concessions?
A seller concession is a portion of the buyer’s closing costs and prepaid expenses that the seller agrees to pay for, lowering the overall upfront costs for the buyer. Sometimes, buyers ask for concessions when the home inspection turns up an issue that needs to be remedied. Other times, the buyer may ask that the seller pay for specific costs, such as the lender origination or appraisal fee.
That doesn’t mean the buyer will get these costs taken care of in cash, though. When a seller agrees to make concessions, they’re agreeing to purpose some of the proceeds of the sale of their home toward the buyer’s costs, effectively rolling the cost into the buyer’s mortgage.
Depending on what’s happening in the housing market, seller concessions don’t always pan out for the buyer. Asking for a concession typically only works favorably for the buyer in a buyer’s market, when there are more homes for sale than buyers to purchase them. In these conditions, sellers might be anxious to offload their property, since demand is low, and more willing to pay for some of the buyer’s costs to make a sale happen.
In a seller’s market, however, there are more buyers than listings, and healthy interest, so a seller may be much less inclined to help a buyer with costs.
What costs are up for negotiation?
Homebuyers can ask for seller concessions for a variety of costs, and can do so in their original offer or during negotiations with the seller. The concessions might cover:
- Origination fee
- Appraisal and/or home inspection fees
- Discount points
- Prepaid homeowners insurance, mortgage insurance and/or property taxes
- Title insurance
- Recording fee
- Attorney fees
The question of who pays the real estate commission might come up, as well. Typically, the seller pays commission to their listing agent, who then shares it with their brokerage and the buyer’s agent, so you likely won’t want or need to ask for this as a concession.
Are there any limits?
What’s allowed as a seller concession can depend on what’s customary in the local housing market, but is also based on the type of mortgage the buyer has, the size of their down payment and the kind of property being bought.
Here’s how seller concessions break down by loan type:
|Mortgage type||Down payment||Allowable concession (as a percentage of purchase price)|
|Conventional (Primary residence or second home)||Less than 10%
|More than 25%||9%|
|Conventional (Investment property)||Any amount||2%|
So, if you’re buying a primary residence for $310,000 with a conventional loan, and you’re putting down 12 percent, or $37,200, the seller can agree to pay for up to 6 percent of the purchase price, or up to $18,600, toward closing costs.
When do seller concessions make sense?
While seller concessions reduce the closing costs homebuyers have to bear initially, they’re an option best exercised in a buyer’s market, when sellers have less leverage and may be eager to sell quickly.
There’s also an important caveat: With seller concessions, the buyer is essentially adding the closing costs the seller has agreed to pay to their mortgage, which will increase the interest the buyer pays on the loan. If you’re a cash-strapped buyer, you may view seller concessions as the key to purchasing your dream home, but in the long run, such financial help can cost more than you anticipate.
Because of this, it’s important to carefully consider whether to ask a seller for concessions, and ideally do so with the help of your real estate agent or attorney. There could be other negotiation strategies available to you, or even other routes entirely, such as a no-closing-cost mortgage, that may be better for your situation.