When buying a home, closing costs can add up to 2-6% of the home’s price. On a $250,000 home, for example, this would be around $7,500. To ease this financial burden, one effective strategy is to negotiate seller concessions. These agreements allow the seller to cover some of the buyers’ closing costs, so fees are less expensive upfront.
In this article, we’ll go through the ins and outs of seller concessions, including the negotiation process and how this agreement can benefit both the buyer and seller.
If you’re looking to avoid lengthy negotiations, iBuyer.com can provide a solution. We connect homeowners with cash home buyers that will provide competitive, cash-offers.
Seller Concessions
Compare Cash Offers from Top Home Buyers. Delivered by Your Local iBuyer Certified Specialist.
One Expert, Multiple Offers, No Obligation.
What Are Seller Concessions?
Seller concessions are financial incentives provided by the seller to help cover the buyer’s costs associated with purchasing a home. These can include closing costs, appraisal fees, and inspection fees. By offering concessions, sellers can make their property more attractive to buyers, making it easier for buyers to manage upfront expenses and facilitating a smoother and faster sale process.
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.
Do Seller Concessions Come Out of Pocket?
Typically, seller concessions do not come directly out of the seller’s pocket. Instead, they are deducted from the seller’s net proceeds at closing. This means the seller will receive less profit from the sale rather than paying out-of-pocket expenses.
If the seller owes more on the mortgage than the home’s sale price, any concessions would effectively reduce their net proceeds further, which could make it unlikely for the seller to agree to such terms.
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.
How Much Can a Seller Contribute to Closing Costs?
The amount a seller can contribute to closing costs varies based on the type of loan the buyer is using and the down payment amount. For conventional loans, seller contributions range from 3% to 9% of the sales price, depending on the buyer’s down payment. FHA and USDA loans allow sellers to contribute up to 6% of the sales price, while VA loans permit up to 4%. These contributions can cover closing costs, prepaid expenses, and discount points, among other fees.
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.
Are Seller Credits Tax Deductible?
Seller credits, also known as seller concessions, are considered sales expenses and can be tax deductible. These expenses reduce the net proceeds from the sale of the home, potentially lowering the seller’s taxable capital gains. However, it is important to consult with a tax professional to understand how these deductions apply to your specific situation and to ensure compliance with IRS regulations.
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.
If you are hoping to sell your home quickly, use our free home valuation tool to see how much your house could sell for. Create an account and get no-obligation cash offers from qualified buyers!
