For many people, owning a home is a goal they’ve long looked forward to. But many first-time homebuyers suffer from sticker shock when they begin to realize just how much money is needed to purchase a home. Suddenly there’s a whole list of costs associated with getting to the closing date--and that doesn’t take into account the down payment or the closing costs themselves. What’s a prospective homeowner to do?
Luckily, there’s a way to help alleviate some of this stress. Seller concessions are often added into the selling price to help lower closing costs. But what are seller concessions?
Seller Concessions Defined
Seller concessions is a term that refers to a scenario where the seller of the home agrees to pay a portion of the closing costs on behalf of the buyer. This lowers the amount of cash the buyer needs to bring to the closing. Negotiating for seller concessions can be a great tactic to employ if you’re tight on cash and feel like you may run short at closing time.
Asking for concessions means that you and the seller agree on a sale price for the home that includes the cost of the concessions. Here’s an example:
Let’s say you’re looking at a home that’s listed at $200,000. You and the seller agree on a sale price of $205,000, with the additional $5,000 going toward your closing costs. This reduces the amount of cash you’ll need at closing, but it increases your mortgage by $5,000. Many homeowners feel this trade-off is worth it because it allows them to pay that $5,000 over time instead of having to come up with the cash up front. This is a viable way to buy a home when large amounts of cash are difficult to come by, but just remember that you’ll actually be paying more than $5,000 thanks to the addition of interest on the loan.
Seller concessions are not required, but many sellers are willing to use them if it means they’re able to sell their house faster. In a buyer’s market, seller concessions are fairly common. They’re also frequently used when the seller is in a tight spot, having already purchased a new house without selling the old one first. In this instance, it’s to the seller’s benefit to offer concessions to the buyer to get the sale to move as quickly as possible so they don’t have to carry two mortgages.
Gaining concessions from the seller reduces the cash needed at closing. Many homeowners are surprised when confronted with the list of fees associated with purchasing their first home. Here’s a list of closing costs that are eligible for seller concessions:
- Appraisal fees
- Home inspection fees
- Property taxes (in some states, these must be paid from the sale date through the end of the year)
- Legal fees (some states require a lawyer to look over the sale contract)
- Title insurance
- Mortgage points (used to lower the interest rate on the mortgage)
- Loan origination fees
- Recording fees
Any of the above are fair game during the negotiation phase of the sale. If you can get the seller to pick up one or two of these, it’ll help with cash flow at the end of the transaction.
Limits on Seller Concessions
There is a limit to the amount that sellers can offer in concessions. By law, sellers are not allowed to pick up all your closing costs even if they wanted to. Overseers in the mortgage industry (entities like HUD and Fannie Mae) set limits on seller concessions to keep housing prices from becoming artificially inflated. Caps imposed on seller concessions vary based on the type of mortgage you’re working with.
Conventional loan – up to 9% of the selling price with a loan to value ratio of 75% or less.
FHA loan – maximum of 6% of the sale price.
USDA loan – maximum of 6% of the sale price.
VA loan – 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.
Source: US News and World Report
Also keep in mind that every mortgage is different, and each mortgage type has its own rules when it comes to the calculation of a down payment. Seller concessions may not be applied to the down payment.
It’s important to understand that getting concessions from a seller does not put cash in your pocket. Concessions are paid at closing time and cover specific fees associated with the loan closing.
Negotiating Seller Concessions
Requesting seller concessions may help you get into the house of your dreams if you ask for them during the negotiation process. An experienced real estate professional can be a big help in this regard. Talk your situation over with them as early in the process as possible because your need for concessions may determine whether the home you have your eye on is accessible to you. If the seller already has four offers on it that don’t require concessions, you may not want to waste your time or theirs by requesting them.
Keep your offer as simple as possible. Sellers like buyers that don’t need a lot of hand-holding or make a lot of requests during the negotiation process. Limit your requests for repairs, replacements, or other items if you plan on asking for concessions. This will increase your odds of getting them. Your real estate agent can help you determine what to ask for if you need concessions to close the deal.
It also bears mentioning that the sale price you settle on with the seller still has to align with the appraised value of the home. Otherwise, the underwriter may decline to underwrite the mortgage.
Determining Whether You Need Seller Concessions
There’s a lot to consider when using seller concessions to buy a new home, but this is a very feasible way for many homeowners to afford their first home. Homestead Financial Mortgage is ready to help you determine whether seller concessions might be helpful in your case. Contact us or stop in at one of our branches in St. Louis, MO; Overland Park, KS; Glen Carbon, IL; or Godfrey, IL, to get your questions answered and start the pre-qualification process for your first mortgage.