What Are Seller Concessions for a Home Purchase? Do you know what the term seller concessions mean? Now, you may have heard the term from time to time, but are you aware of the benefits and risks? And how does it work?
Everyone is familiar with the saying that “there is no such thing as a free lunch”, well when it comes to buying a new home, a free lunch is almost always out of the question.
When you purchase a new home, not only do you have to cover your down payment, but you also need to consider all the closing costs and fees associated with obtaining a mortgage that will be used to finance your purchase.
If you are trying to minimize the amount of money you need to bring to close, it may be in your best interest to seek out seller concessions. They are a great way to help cover some of the costs associated with buying your home. This includes potentially covering a portion or all of your closing costs.
Below we will review these credit and how they can help reduce your closing costs.
How Do Seller Concessions Work? – What Are Seller Concessions for a Home Purchase
Seller concessions, sometimes referred to as seller credits, are costs and fees that the seller agrees to pay on behalf of the buyer. The amount can be expressed as either a specific dollar amount or a percentage of the purchase price.
Sellers are not required to provide concessions. If they do agree to any then those concessions must be listed on the final Closing Disclosure.
While the concessions don’t often cover all costs associated with real estate closing or obtaining a mortgage, they can cover, but are not limited to, items such as loan origination fees, points, inspection and repair costs, or even prepaid real estate taxes1.
Seller Concession Caps – What Are Seller Concessions for a Home Purchase
It’s important to realize that there are limits to the amount of seller concessions you can use with any given mortgage transaction.
Most of the time the cap on concessions is dependent upon how much money you are putting down and what type of mortgage loan you are applying for.
For example, conforming conventional financing caps seller concessions between 3-9%, while an FHA mortgage cap is generally around 6%. Usually, the more you are putting down, the greater the concession cap. This also assumes you are purchasing a primary residence or second home2.
Seller concessions may be permissible for non-owner-occupied dwellings, but have limits as well. For all transactions, at no time should these concessions exceed a buyer’s total closing costs.
Pros and Cons to Using Seller Concessions – What Are Seller Concessions for a Home Purchase
Seller concessions are a great tool to help you save money on your purchase by paying less money out-of-pocket towards fees and charges that do not impact your equity in the property. This allows you to maximize your down payment.
In situations where the real cost for financing exceeds your estimations, a seller’s concession could save your purchase from potentially falling through. They can help you overcome shortcomings for necessary assets by reducing your overall cash to close.
One drawback to seller concessions is that you cannot always rely on them. When markets are more competitive, sellers may not elect to provide a seller’s credit, but rather simply move on to the next best offer.
It can also be more beneficial to negotiate a lower purchase price rather than ask for seller concessions. However, these credits are fairly common, especially for purchases involving first-time home buyers with limited savings.
Please make sure to do your due diligence and consult your CPA if needed. Seek the guidance of your realtor and New Century Mortgage to find out more.
1 Seller concessions: How a seller can pay your closing costs. (2020, July 31). Retrieved August 5, 2020, from https://themortgagereports.com/18172/seller-concessions-closing-costs#FAQ
2 B3-4.1-02, Interested Party Contributions (IPCs) (08/07/2019). (2019, August 07). Retrieved August 5, 2020, from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-4-Asset-Assessment/Section-B3-4-1-General-Asset-Requirements/1032996781/B3-4-1-02-Interested-Party-Contributions-IPCs-08-07-2019.htm