Tips For Reducing Closing Costs With a Seller Concession
When you are buying your first house, there is quite a bit of money involved. First, you need to come up with the necessary down payment funds, which can be substantial. If that weren't bad enough, you would also have to pay closing costs when getting a mortgage. When all is said and done, coming up with the necessary money to be a home can be significant.
Fortunately, there is a way you can get some assistance to cover your home buying costs. One such way is through seller concessions. When you've not bought a home before, you may have never even heard of the term seller's concessions.
Working as a real estate agent over the past thirty-four years, numerous buyers and sellers have asked me what are seller concessions. The concept is rather simple and can be a godsend to home buyers. Maximum Real Estate Exposure has an in-depth resource covering all angles regarding concessions. We will cover the basics here.
A seller concession is when the owner of a home you're interested in purchasing contributes towards paying your closing costs. By reducing your closing costs through seller's concessions, you can free up that money to use elsewhere. Maybe there are some immediate improvements you would like to make to the home? You could also feel more comfortable having additional funds in reserve for when you need them. The monies could become part of your emergency fund.
Let's take a look at everything you need to know about seller's concessions to see if they would fit when you purchase a home.
What Seller Concessions Represent?
Seller concessions include a certain amount of money or a percentage of the acquisition price that the seller intends to cover. The seller contributes with the respective amount/percentage, which has been previously agreed, to the buyer’s closing costs.
The Seller Concession Process
Let's look at a real-world example of how a selling concession would work for the parties involved. You are going to purchase a home for $400,000. The seller has agreed that they will pay for 2.5% of your total closing costs. In this example, the seller would be paying $10,000 or 2.5% of $400,000.
In this real estate transaction, the final sales price would be $400,000; however, the seller would only be netting $390,000. This is called the “net to seller price.” The extra $10,000 goes to help the buyer cover closing costs.
Who is the Beneficiary?
This is a win-win situation. Choosing to get seller concessions is practically helping both the buyer and the seller.
The benefits for the house buyer are the most significant. The seller's concessions allow them to pay a lower price when some of their closing costs are paid. Thus the home is more affordable for the buyer, and they have cash in reserve.
Yet, the seller also has something to gain from the seller's concessions. If they agree to this, they also increase the chances of selling their property. The entire selling process will happen much faster than without them agreeing to seller concessions.
Seller Concessions Can Be Adjusted Based on The Real Estate Market
What should be made clear is that a seller's concession can be worked so that the seller is not taking less money for their home. You might see a seller contributing towards the closing costs in a seller's market but not actually sell for less.
Using the example above, a seller can pay for a buyer's closing costs by increasing the sales price by $10,000 to $410,000. The seller will net their asking price of $400,000, and the buyer will get their $10,000 concession. This would be the same as the seller accepting a full-price offer.
The only potential problem you have to worry about is the home appraising for the higher sale price. Usually, this is not an issue.
What Do Seller Concession Cover?
Seller concessions cover almost everything included in the closing costs. They can cover the fees and taxes, as well as the title insurance.
Advantages of Seller Concessions
As you already saw, the first advantage of seller concessions coming to mind is they help the home purchaser pay less at closing time.
This fact brings along also several other advantages:
- The up-front costs are reduced.
- The property becomes more affordable and attractive for buyers.
- The seller can address a wider range of buyers when the level of their budget is concerned.
- The selling/purchase process becomes easier and faster.
- The house is coming off of the real estate market in no time, allowing for a shorter closing time period.
Disadvantages of Seller Concession
As expected, any benefits also come with several disadvantages. In case of seller concessions, here is what you can expect to be bothersome:
- Requesting seller concessions from a house owner will decrease your quality and appeal as a potential purchaser in a hot seller's market.
- In a competition between several potential buyers for the same property, the one asking for seller concessions has lesser chances to close the deal.
- This process is slightly more complicated for the seller than the simple selling procedures, where the buyer covers by themselves all closing costs.
Seller Concessions Vary According to the Loan Type
The percentages agreed for seller concessions are influenced by the buyer’s mortgage type. This also varies depending on the loan offer received from each mortgage company.
Here are some of the most common seller concessions amount/ percentage, depending on the type of loan you choose:
- FHA Mortgage – seller concession up to 6% of the property’s selling price.
- USDA Mortgage – in this case, the seller concession percentage covering closing costs can also go up to 6% of the selling price.
- VA Mortgage – in this case, you can use the seller concessions to cover up to 4% of your financing.
- Conventional Mortgage – here, things are more complex. Seller concessions vary on your down payment amount. For down payments up to 10% - you can get up to 3% seller concessions. For down payments between 10 – 25% - the seller concessions covering the closing costs can rise to 6%. For down payments over 25% - seller concessions go up to 9% of the net home price. Investment Property – in this situation, the down payment has no influence whatsoever. The seller concessions can go only up to 2%.
Having a seller contribute to a buyer's closing costs is a great way to make a real estate transaction work financially for a buyer. Seller's concessions are a common part of many real estate sales. If it makes sense, don't be afraid to ask for a concession the next time you purchase a home.