Buying a home is exciting, but it can be a huge investment. Negotiating concessions with the seller can make the upfront cost of homebuying easier to bear.
Can Seller Concessions Save You Money When Buying a Home?
Seller concessions can help you save if they reduce the amount you have to pay at the closing table. Closing costs generally run 2 to 5 percent of the home’s purchase price. Based on a national median home value of $226,300, the typical borrower pays $4,526 to $11,315 in closing costs. Asking a seller for concessions can mean less cash out of pocket to finalize the purchase of a home.
What Are Seller Concessions?
“When we talk about getting seller concessions, we generally are referring to when the seller agrees to pay all or some of the closing costs,” says Joshua Potts Sr., owner/broker at Spartan Realty in Stafford, Virginia. “Getting the seller to pay these costs would be part of the offer and subsequently part of the negotiations.”
Fees that may be covered by seller concessions include:
— Property taxes
— Attorney fees
— Appraisal costs
— Mortgage discount points
— Title insurance fees
Seller concessions aren’t a requirement, and sellers are under no obligation to grant them to buyers. It works like this: The buyer (or the buyer’s agent) negotiates the concession amount with the seller or the seller’s agent. Together, they agree on a sale price that includes the amount of the seller concessions. For example, if a home’s initial sale price is $200,000, you and the seller may agree on a higher price of $205,000, with the additional $5,000 representing the concession amount. The concessions are then typically added on to the mortgage and used to pay closing costs.
Concessions don’t give buyers cash back at closing, nor can they be used to cover the buyer’s down payment. They’re strictly intended to reduce what the buyer pays at closing.
[Read: Best Mortgage Lenders.]
Is There a Limit on Seller Concessions?
The short answer is yes. A seller can’t offer unlimited concessions. The cap on concessions depends on the type of loan involved.
This table illustrates the seller concession rules of different mortgages:
|Conventional Fannie Mae/Freddie Mac loans||Up to 9 percent of the sale price with a loan to value ratio of 75 percent or less|
|FHA||Maximum of 6 percent of the sale price|
|USDA||Maximum of 6 percent of the sale price|
|VA||Capped at 4 percent of the loan amount; applies only to certain costs, such as the VA funding fee and payments of prepaid closing costs|
Note that different limits may apply to jumbo loans or nonprime mortgages.
Also keep in mind that each of these loans has its own requirements with regard to down payments, which aren’t covered by concessions. With an FHA loan, for example, you’re required to put at least 3.5 percent down. USDA and VA loans, on the other hand, don’t require down payments.
Seller Concessions Can Help Buyers and Sellers
Seller concessions offer an obvious advantage to homebuyers.
“The pros are mostly based around the fact that you’ll be lowering your costs to close the loan on the home,” says Ralph DiBugnara, president of real estate and finance web video series Home Qualified and vice president at mortgage lender Cardinal Financial. Further, he says that “a buyer can use this as a negotiation tactic when they’re looking to sweeten the deal.”
For example, you may have found a home that’s practically perfect — except for a few upgrades you’d like to make. While seller concessions don’t put money in your pocket directly, they can free up cash that you would have spent on closing to make those upgrades after you buy.
“For the buyer, it’s the ideal situation for the seller to maximize the amount of seller concessions allowed by the loan type,” Potts says.
Offering concessions can also yield some advantages from a seller’s perspective.
It’s in a seller’s best interest to offer concessions if the buyer couldn’t purchase the property without the closing costs being covered, Pott says. “This situation is common, and there are sellers willing to pay this cost if there is lack of offer activity.”
In other words, offering concessions could give sellers an edge in a buyer’s market. Sellers may also agree to concessions if they need to get out of the home quickly because they’ve already purchased another home and don’t want to carry two mortgages.
Potts says buyers should be aware of factors that could put concessions out of reach.
“Keep in mind there are sellers that do not have enough equity to cover these costs,” he says. “Sellers with little to no equity and a buyer who cannot afford to pay for closing costs will most likely end up not working out.”
Claire Groome, an agent with Warburg Realty Partnership in New York City, says concessions can be appealing to first-time buyers, but notes there can be another hitch if the appraisal for the home comes in lower than expected. If you and a seller agree on a higher sales price to accommodate concessions, it has to align with the home’s appraisal value. Otherwise, the lender may not agree to underwrite the mortgage.
[READ: FHA Loans.]
Do Seller Concessions Affect a Mortgage?
If you’re rolling concessions into your home loan, that’s a potential downside, says DiBugnara, since you’ll be financing the concessions over the life of your mortgage.
How much of an impact that makes on your monthly payments depends on how much you’re financing. Here’s a side-by-side example of how it works with a $250,000 conventional loan, assuming a 5 percent down payment:
|Concession amount||None||3 percent ($7,500)|
|Down payment (5 percent)||$12,500||$12,875|
|Interest rate||4.5 percent||4.5 percent|
|Loan type||30-year fixed rate||30-year fixed rate|
|Monthly payment, including principal, interest and PMI||$1,354||$1,394|
|Cost of concessions||$0||$40/monthly|
An extra $40 per month doesn’t seem like much at first glance. But over the life of the loan, you’d pay nearly $6,000 in additional interest with concessions. If you receive concessions worth $7,500 and pay an additional $6,000 in interest, the concessions actually cost $13,500.
Negotiating Seller Concessions
Potts says if you’re planning to ask for concessions, talk it over with your agent first.
“If the buyer needs closing costs, this is something the buyer and Realtor need to discuss early in the relationship,” he says. “This is important because it will dictate whether or not a specific property is even worth pursuing.”
It’s also a good idea to scout conditions in the broader market.
“Buyers should do research as to what other sellers are offering,” Groome says. “They should discuss with their brokers the possibilities of asking for certain concessions if they feel the property has been sitting and having difficulty moving in a sluggish market.”
Also, estimate the value of concessions over the long term. Whether it’s worth it to pursue concessions may ultimately come down to how much you could save before you buy versus what you’ll pay later if concessions are rolled into your loan.
Review Your Budget Before Buying a Home
Seller concessions can be a helpful tool for managing upfront homebuying costs, but as you prepare to become a homeowner, consider the bigger financial picture.
“At the end of the day, the buyer needs to understand the various costs and monetary considerations associated with purchasing a home,” Potts says.
That includes both the “before” and “after” costs of buying and owning a property. On the before side, consider your:
— Earnest money deposit
— Down payment
— Home inspection fees, including pest and septic inspection fees
— Appraisal fees
— Upfront costs required for escrow, such as homeowners insurance, property taxes and homeowners association fees
— Moving costs
— Disconnection and connection fees for utility services at the old and new homes
Use a closing costs calculator to estimate what you might have to pay at closing.
On the after side, you’ve got your monthly mortgage payment and utility costs for owning the home. Beyond that, you’ll need to consider costs for ongoing maintenance and repairs, as well as any upgrades or renovations you’d like to make. You should expect to spend about 1 percent of your home’s value on maintenance each year, about $187 monthly for a home worth $223,900.
Estimating the total cost of home ownership before you buy can help you stay on budget. Lastly, consider beefing up your emergency savings so you have cash on hand to cover any unexpected expenses.
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