Purchasing a home can be an exciting experience but also an expensive endeavor. Not only do you have to save up enough money for a down payment, but you'll also need to have extra set aside for closing costs, as well as lender fees, if obtaining a loan, which can vary based on the loan type, like a VA loan or an FHA loan.
If you're tight on funds for closing or trying to lower the amount you have to bring to the closing table as a buyer, it may be worthwhile to ask for seller concessions to help pay for some or most of your closing costs. This article explains what seller concessions are, how they can help you lower your closing costs as a buyer, and when it's the right time to ask for seller concessions in a real estate transaction.
What are seller concessions in real estate?
In real estate, a seller concession is a specified amount or percentage the seller is willing to pay on behalf of the buyer to assist in the buyer's closing costs. If a seller agrees to offer a concession, it is added to the final closing statement or HUD-1 under seller-paid closing costs and is in addition to normal seller's closing costs.
Seller concessions can pay for certain fees associated with a real estate closing or mortgage for the buyer including:
There are caps as to how much a seller can offer as a concession in a real estate transaction, depending on the type of mortgage loan the buyer is getting.
Concession caps by loan type
|USDA Loan||Up to 6%|
|VA Loan||Up to 4%|
|FHA Loan||Up to 6%|
|Conventional Loan||Up to 9%, depending on the down payment|
How can I reduce closing costs with seller concessions?
Both buyers and sellers pay closing costs in a real estate closing. Sellers typically pay more than buyers, depending on whether a real estate agent is involved -- around 8% to 10%, according to Zillow (NASDAQ: Z) (NASDAQ: ZG).
The average buyer's closings costs for a home are between 2% and 5% of the total loan amount or sales price, according to the National Association of Realtors (NAR). This can equate to the buyer having to pay several thousand dollars more at closing on top of the down payment.
Buyers can request seller concessions to help reduce the amount of cash needed at closing.
For example, if the buyer has $22,000 in total for the purchase of a home and is putting $18,000 down, they can request the remaining funds needed for closing costs as a seller concession.
A common method of reducing closing costs with seller concessions is by the buyer offering a higher amount than the list price with a seller concession. For example, if the list price is $225,000 the buyer could offer $230,000 with a $5,000 seller concession at closing. This would reduce the total closing cost needed from $11,250 (that's 5% closing cost at $225,000) to $6,500 (that's 5% of $230,000, minus $5,000).
When should I ask for a seller concession?
Seller concessions are more common in a buyer's market than a seller's market and are especially common with first-time home buyers. Although a buyer can request a seller concession at any time. Typical scenarios when it makes sense to ask for a seller concession are when:
- The property inspection reveals that significant repairs or improvements are needed in the home.
- The appraisal came back with a value lower than the contract price.
- The seller is having a difficult time selling the home.
- The buyer has limited funds for closing beyond their down payment amount and cannot buy the home without assistance.
While it may seem silly not to ask for a seller concession when buying a home, it's important to remember that asking for a seller concession may result in a declined offer or losing the home to a more competitive offer, especially if it's a seller's market, because it's going to require the seller to pay more or earn less from the sale.
How can I request a seller concession?
If you feel you are in a situation where requesting a seller concession makes sense, you can ask for the concession at one of these two times:
- At the time of the offer as an additional clause.
- After you've entered into a contract as a part of renegotiations.
If seller concessions are requested as a part of renegotiations, make sure they are requested before the inspection period expires so as not to risk the escrow deposit in the event the seller declines.
If you do ask for a concession, try to make the offer more appealing to incentivize the seller to say yes. Seller concessions are fairly common, and in a strong buyer's market, it doesn't hurt to ask. If you are using a real estate agent, ask for their expert opinion on whether asking for a seller concession is right for your situation. Most often, your agent will advise you on what they feel is best given the current market and their knowledge of the seller's motivation to sell.
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