Key Takeaways
- Seller concessions can cover up to 6% of closing costs.
- They reduce your upfront expenses significantly.
- Concessions must be negotiated before signing the contract.
- They can't be used for your down payment.
Article Summary
Seller concessions are an agreement within a real estate contract whereby the home seller agrees to pay for some or all of a home buyer's closing costs.
Seller Concessions: Explained in Plain English
A seller concession is an agreement written into the purchase contract where the seller pays certain home-buying expenses for the buyer.
Lenders allow concessions up to specific percentage amounts. The maximum depends on loan type, loan-to-value (LTV) ratio, and the home’s appraised value.
Seller concessions can be used to pay for closing costs, title insurance, inspection fees, property taxes, and other costs paid at closing. They cannot be used for any portion of a buyer's downpayment.
Concessions must be negotiated before the contract is signed. They cannot be added later during mortgage underwriting.
Seller Concession Limits by Loan Type
| Loan Type | Maximum Seller Concession |
|---|---|
| FHA mortgages | 6 of purchase price |
| USDA mortgages | 6 of purchase price |
| VA mortgages | 4 of purchase price |
| Conventional mortgages | 3 of purchase price |
Seller Concessions: A Real World Example
Imagine a scenario where a first-time home buyer finds their dream home. The house is priced within the home buyer's budget, but after setting aside money for a small down payment, the buyer is concerned about not having enough funds left over after paying closing costs to furnish the new home or make small repairs.
The buyer asks their real estate agent to negotiate seller concessions into the contract, which will cover the closing costs associated with the purchase, including mortgage origination fees, mortgage discount points, title insurance fees, and more.
The seller agrees to pay the buyer's costs, and the purchase contract is ratified.
Common Questions About Seller Concessions
Get answers to frequently asked questions about seller concessions, including what costs they can cover, limits by loan type, and negotiation requirements.
What types of costs can seller concessions pay for?
Seller concessions can cover various costs, including closing costs, prepaid interest, home inspection fees, and property taxes or homeowner's insurance.
Are there limits to seller concessions?
Yes, lenders limit seller concessions based on the home buyer's mortgage loan type. Concessions can range up to 9% of the purchase price. The limits vary based on the loan type, loan-to-value ratio, and the home's appraised value. Buyers should check with their lender to confirm the maximum allowable concessions for their situation.
Can seller concessions be denied by a mortgage company?
Yes, if the appraised value of the home is less than the contract's sale price, a lender may disallow seller concessions.
Can seller concessions be used for a down payment?
No, seller concessions cannot be used as cash toward a down payment. Seller concessions can only be used for closing costs and prepaid items linked to a purchase.
