When buying a home, much like any purchase, the final amount due at closing is usually higher than the price of the home. In other transactions, these costs are sales tax or processing fees and are small percentages.
Buyers can typically expect to pay around 2%-6% of the price of the home in closing costs. However, 3% of a $250,000 home is $7,500. Oh, and closing costs are paid in cash at the time of closing.
That’s $7,500 out of your pocket. Is there a way to avoid paying so much in closing costs out of pocket?
Negotiating seller concessions can be a great way to share some of the burdens of closing costs with the seller.
So what are seller concessions? And what does seller concessions mean for your closing costs?
Keep reading to discover the answers to these questions and everything else you need to know about concessions.
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What Are Closing Costs?
Closing costs are determined based on the house you’re buying, when you decide to buy, where you decide to buy, and the type of loan you are purchasing.
Here’s a more detailed breakdown of the various closing costs you as the buyer are responsible for.
Costs Associated with the Property
- Escrow – Includes a portion of property taxes and insurance paid upfront.
- Appraisals – required by lenders to ensure the home is worth the asking price.
- Surveys – any property surveys to determine property lines are paid by the buyer.
- HOA Fees – homes bought within an HOA may require the HOA fees to be paid upfront.
Costs Associated with Loans
- Application Fee – Non-refundable fee paid to the lender even if the loan is denied.
- Title Search – The cost of researching the home’s title history to ensure the proper ownership.
- Loan Interest – prorated from the closing date to the first of the month.
- Lender Fees – any fee charged by the lender for the loan
Miscellaneous Costs
- Homeowner’s Insurance – You may be required to pre-pay a year of insurance.
- Mortgage Insurance – There is a fee for applying for mortgage insurance which may be necessary with a down payment of less than 20%.
- Credit Checks – You may be required to pay any fees associated with pulling your credit history.
What Is a Sellers Concession?
A seller can offer to pay a portion of the closing costs. Typically this is either by paying directly for certain closing costs or by paying a percentage of the total in closing costs.
However, when sellers agree to concessions, they will typically include the cost of those concessions in the cost of the house. For example, if the seller is selling a house for $300,000 and agrees to $5,000 in concessions.
As the buyer, your loan will increase by $5,000. Totaling out at $305,000. This may save you in the out-of-pocket expenses arena. But, will cost you more in loan payments over the long term.
Despite this, there are still many benefits to both the buyer and the seller.
Benefits for the Buyer
Often times it is nearly impossible to accurately estimate the amount in closing costs you’ll have to pay. Typically, closing costs work out to be more than expected.
For a first-time home buyer, this is especially true. Seller concessions can help to reduce the amount of cash needed at the time of closing.
Some loans, like the VA loan, require inspections of the home before approving a loan. These inspections are to ensure you as the buyer are getting a house worth the amount of the loan.
These inspections differ from appraisals. Appraisals refer to the monetary worth of a home. These inspections are more for safety and to protect you and the lender against purchasing a home that is seconds away from falling apart.
As the buyer, you can request to have any repairs or improvements demanded by the lender covered by the seller in the seller concessions.
Benefits for the Seller
For the seller, conceding some of the closing costs can assist in getting your house off the market sooner rather than later. Depending upon your situation, seller concessions can make your home more attractive to potential buyers.
Concessions can also help buyers who might be on the fence. Sometimes buyers are cautious and never truly commit to the purchase until closing day. This can leave the seller stressed out and anxious. Afraid the sale will fall through at the last minute.
Offering seller concessions can help buyers feel more at ease when purchasing a home.
Negotiating Seller Concessions
The first thing to understand how to ask for concessions from a seller is the state of the market. More specifically, whether it is a buyer’s or seller’s market.
A buyer’s market occurs when there are a plethora of houses for sale but few buyers. The opposite is true for a seller’s market where there are a lot of buyers but few houses for sale.
In a seller’s market, it is almost impossible to get a seller to agree to seller concessions. After all, they have several buyers to choose from, whereas you as the buyer are limited in your choices of homes to buy.
If you find yourself in a buyer’s market, you have a little more leverage to work with. Sellers are often eager to sell their homes quickly. Not necessarily to get rid of it, but maybe they need the money to buy a new home or have already purchased a new home and don’t wish to pay two mortgages.
In either scenario, a seller wishes to sell their home quickly. In this case, you may be able to convince the seller to concede some of the closing costs in order to make the sale smoother and quicker.
When asking for concessions, don’t overcomplicate the deal. If the seller seems to push back at the suggestion of seller concessions, try adjusting the offer. Offer a percentage to be paid against the total rather than an itemized list of costs to split up.
Whether in a seller’s market or buyer’s market, if there are multiple offers on the table, the seller will choose the easiest and most lucrative offer.
Limits on Seller Concessions
There are limits to the amount of the buyer’s closing costs a seller can pay. The specific amount depends on the type of loan purchased. However, no matter what loan is used, the seller cannot pay all of your closing costs.
Limits on seller concessions help to keep the housing market from inflation. A seller wanting to sell their home quickly could inadvertently raise the price of other homes in the local area to rise at an unsustainable rate.
This happens when a seller lists their house on the market at $400,000 but agrees to sell for $425,000 to cover all closing costs and allows the buyer to keep what’s left.
For the buyer, this is a pretty good deal. All closing costs are covered and whatever is left out of the additional $25,000 goes back into the loan or a bank account. But, when other realtors and sellers see what the house sold for they too will raise their prices.
After a while, the prices of houses in the area have risen so high that no one can afford to buy or sell. To prevent this, sellers are only allowed to contribute a certain percentage of their home’s listed value towards a buyer’s closing costs.
What Are Seller Concession Limits?
The specific amounts and limits a seller can contribute to closing costs depend entirely on the type of loan you are using to purchase the home. These limits also help determine what are concessions when selling a house and what is not.
Conventional Loans
A conventional loan is a non-government-backed loan. This means they have stricter credit requirements than a government loan like FHA loans, and also require a down payment.
The percentage a seller can contribute to closing costs is based on the amount of the down payment. Generally, the seller can only contribute between 3% and 9% of the lesser of the appraised value or sale price.
The percentage breakdown is as follows:
- If the down payment is under 10% the seller can contribute up to 3%
- With a down payment between 10-25%, seller concessions are up to 6%
- For down payments over 25%, the seller can contribute up to 9%
For example, if a seller is listing the home for $200,000 but the appraisal values the home at $190,000, the seller may pay up to 9% of $190,000 in closing costs. Which comes out to roughly $17,100.
However, if you are purchasing an investment property, the seller can only contribute up to 2% regardless of how much your down payment is.
VA Loans
Veterans Affairs loans are home loans for qualifying veterans of the armed services. They help make it easier for vets to find affordable housing while also ensuring veterans are protected.
VA loans do not require a down payment and as a result, require a home inspection to ensure safety. The VA may require railings to be installed on the stairs, smoke detectors in every room, and plumbing and electrical to be up to code.
VA loans allow sellers to contribute up to 4% of the loan amount. Seller concessions for VA loans often include the needed repairs and improvements before the VA will approve the loan.
FHA Loans
Federal Housing Authority (FHA) loans are backed by the government and are to help those with a low credit score or debt. These loans offer lower credit score requirements and lower monthly payments.
However, you will be required to pay a mortgage insurance premium. This will protect your lender from any losses if you default on your loan.
When using an FHA loan, sellers are allowed to contribute up to 6%. Seller concessions cannot be used towards the down payment.
USDA Loans
USDA loans are backed by the United States Department of Agriculture. They are to assist those living in designated rural areas in affording homes. Much like the VA loan, the USDA loan does not require a down payment.
However, the seller can contribute up to 6% of the loan amount.
Seller Concessions and Taxes
There are no major tax consequences or penalties to be concerned about with seller concessions. While closing costs are not deductible, some seller concessions may be.
Currently, the IRS only allows home mortgage interest and some property taxes to be deducted. However, if the seller agrees to concessions in the form of mortgage discount points, you can reduce your mortgage interest with those points.
The IRS has strict rules for home buyers and especially first-time home buyers on what can be taxed and what can be deducted from taxes. Contacting a tax professional will help you get the most out of your deductions associated with your home purchase.
When Sellers Concede
Seller concessions can be a great way to help with closing costs at the time of purchase. However, a seller cannot pay for all of your closing costs.
The type of loan you are using to purchase your new home will determine the amount the seller can contribute in concessions. Sellers are under no obligation to pay any portion of a buyer’s closing costs.
When asking for seller concessions, remember the state of the housing market and other offers will dictate how open to concessions a seller will be.
Seller concessions, however, can be a great way to sell your home fast.
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