*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.
When you buy a home, you pay fees, called closing costs, to cover the costs of getting the mortgage. Closing costs usually range from 2% to 5% of the home price.
In some cases, you may be able to get the seller to pay for some of these closing costs. These are called seller concessions, and they can be a powerful way to save on your closing costs. Before you close on your mortgage, learn how to use seller concessions to your advantage.
What Are Seller Concessions?
Seller concessions are closing costs that the seller has agreed to pay.
Sometimes, you can ask the seller to contribute to specific closing costs. Other times, sellers may simply pay a percentage of the total closing costs.
What Closing Costs Do Seller Concessions Cover?
The seller may be able to cover part or all of these closing costs:
- Property taxes: You may pay for your property taxes through the end of the year at closing.
- Title insurance: Title insurance protects you and your lender if someone comes forth with a claim for the home’s title.
- Loan origination fees: These fees cover your lender’s charges for processing your loan.
- Inspection fees: Inspection fees cover the cost of inspections required for the loan. For example, in some states, a pest inspector must evaluate your property before a sale can go through.
- Recording fees: This fee covers the expense of documenting your home’s purchase with local government.
- Appraisal fee: This covers the cost of getting a third-party appraisal of the home to determine the market value.
- Attorney’s fees: In some states, you need an attorney to review closing documents. Attorney’s fees cover the cost of real estate attorney services.
- Points: Mortgage points (also known as discount points) are an upfront fee you pay to reduce your interest rate.
Once you apply for your loan, your lender will give you a Loan Estimate, which shows all your estimated closing costs. You can work with your real estate agent to decide which ones to ask the seller to pay for.
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Benefits And Drawbacks Of Seller Concessions
Benefits Of Seller Concessions
Seller concessions allow you to pay less at closing to make buying a home more affordable. As a buyer, you’ll usually have to bring at least a few thousand dollars to the table for closing costs and your down payment. Seller concessions can cut these costs significantly so you don’t have to completely empty your savings to buy a home.
Agreeing to concessions can be good for the seller in some circumstances. For example, seller concessions can help the seller get their home off the market faster. If the seller is eager to close on the sale, they may be willing to pay part of the buyer’s closing costs to speed up the process.
Drawbacks Of Seller Concessions
Asking for seller concessions might make you a less appealing buyer. Most sellers are looking for offers that don’t have a lot of strings attached.
If a home has multiple bids, the seller will probably disregard offers that include concession requests. In this instance, it may be better to put in a lower offer for the home and cover the closing costs yourself. This option is easier for the seller and may increase the chance your offer will get accepted.
How To Negotiate Seller Concessions
You know that you want to ask for concessions, but how do you convince the seller to help you pay? Asking for concessions is all about negotiating and understanding the current housing market.
First, you’ll need to figure out whether you’re in a buyer’s market or a seller’s market. This will heavily influence your ability to negotiate for concessions. Sellers are much more motivated to offer concessions when their home has been sitting on the market for a while or when it’s a buyer’s market.
If you decide to ask for concessions, limit your other demands. Sellers like to take the offer that’s the least complicated for them. If you ask for concessions as well as repairs, replacements and services, the seller is more likely to pass on your offer. If repairs are an absolute must for you, consider offering a lower price and covering closing costs yourself.
If you know you want to ask for concessions, we recommend working with a real estate agent. Your real estate agent can research local sales and tell you about your area’s housing market. They can also find similar properties that closed with concessions. Presenting examples of recent seller concessions can motivate your seller to work with you on closing costs. If your real estate agent thinks you’re in a seller’s market, they can help you decide whether you should ask for closing costs or put in a lower offer.
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Are There Limits To Seller Concessions?
Your seller can’t pay all of your closing costs. How much your seller can pay depends on the type of loan you’re getting and a few other factors.
Keep in mind that the total amount the seller contributes can’t exceed your total closing costs. For example, let’s say you buy a home worth $200,000 with a conventional loan and a 20% down payment. In this case, the seller could legally contribute up to 6% ($12,000). But if your closing costs are only $5,000, the seller can’t give you more money.
Why There Are Limits To Seller Concessions
What’s the point of setting limits on seller concessions? Mortgage rule-makers like Fannie Mae and HUD set limits on seller concessions to discourage inflation in the housing market.
For example, let’s say you want to buy a home worth $150,000. The seller offers to sell you the home for $175,000. He offers you $25,000 for closing costs and tells you to keep anything left over.
Even though this might be a good deal for you, it will cause local housing prices to rise. When other sellers and agents see what the home sold for, the prices of other homes will go up to match the inflated market value.
This cycle can quickly cause home and rent prices to rise to unsustainable levels. To avoid this, sellers are only allowed to contribute a small percentage of their home's value to closing costs.
Seller Concession Limits By Loan Type
The restrictions on seller concessions vary by loan type. The lesser of the sale price or the appraised value usually dictates how much your seller can pay in concessions.
For example, say you offer $155,000 for a home. The home appraises for $150,000. If the seller concessions max out at 3%, the seller can contribute up to 3% of $150,000, or $4,500, to help with closing costs.
Here are the seller concession limits for some common loans.
The limit for conventional loans depends on how much you’re putting down:
- If your down payment is less than 10%, the seller can contribute up to 3%.
- If your down payment is between 10% and 25%, the seller can contribute up to 6%.
- If your down payment is more than 25%, the seller can contribute up to 9%.
- If you’re buying an investment property, the seller’s contribution is limited to 2%, no matter what your down payment is.
For all FHA loans, the seller can contribute up to 6%.
For USDA loans, the seller can contribute up to 6% of the buyer’s loan amount. This is the one loan type where the seller concessions are not based on the home price or appraised value.
VA loan rules dictate that the seller can contribute up to 4%. Seller concessions on VA loans may include payments toward a buyer’s judgments and debts, as well as VA funding fees.
Seller concessions are closing costs the seller agrees to pay. They can make a home more affordable for the buyer, and they can help the seller close the deal.
Work with your real estate agent to decide whether you have a good opportunity to ask the seller for concessions. If the market is right, you may be able to ask the seller to pay for part or all of your closing costs. You just have to make sure what you’re asking for is within the limits dictated by the type of loan you’re getting.