By Alena Kairys

Oct 21, 2022

Just a few months ago, it was an intense seller’s market in many parts of the country. Now the pendulum is swinging the other way, and buyers have more ground to stand on. The market is still tight, but there’s a bright light for buyers: seller concessions are back.

What are Seller Concessions?

Seller concessions are costs that sellers offer to cover to help sell the home. Buyers can use seller concessions or seller credits as a negotiation tactic to save money, and it can be especially powerful in a populated buyer’s market. In return for receiving a concession, buyers can offer sellers incentives that ease their burden, such as offering a rent-back agreement or not asking for pricey repairs. It’s more common for sellers to offer concessions if they’re trying to sell the house quickly or are trying to get an edge over other sellers in the market. Although the goal of concessions is to make the sale more appealing to buyers, they should benefit both parties.

Types of Seller Concessions

Temporary Rate Buydowns

You can negotiate with the seller to get a lower initial interest rate through a temporary rate buydown, which allows you to save money for the first few years of your mortgage. In this scenario, the seller provides funds to be deposited in your escrow account to subsidize the loan’s interest for a limited time period. Some common types are the 2-1 and 1-0 buydown. With the 2-1 buydown, the interest rate is lowered by 2% for the first year and 1% for the second year. Afterwards, you’ll pay the full rate for the life of the loan or until you refinance. The 1-0 buydown has the same setup, but the discount period is shorter.

Closing Costs

Concessions that pay for a portion of the buyer’s closing costs are one of the most common types of seller concessions. The title search fee, origination fee, home inspection, application fee, and discount points are just some of the things that make up closing costs, which the buyer normally pays for. If conditions are favorable, it may be worth asking the seller to cover some of these expenses—closing costs are typically 3-5% of your mortgage!

Repairs

After the home inspections results are released, some buyers may be unsure about closing on a house that needs significant repairs. To keep the sale moving forward, sellers may offer concessions that will subsidize improvements after the house is sold. This strategy can be a great way to reduce the buyer’s out-pf-pocket costs for any home repairs and lets them choose their own contractors. It also prevents closing from being delayed by contractors and gives buyers peace of mind that they can afford to fix up the home. Some sellers may offer home warranties as a buyer incentive, too.

Things to Consider

Limits on Concessions

If you’re thinking you can get the seller to pay all your buyer costs, think again. Sellers are limited in how much concessions they can pay, and these restrictions are meant to prevent housing market inflation. The allowable amount will depend on the type of loan you use and some individual factors:

Conventional: If you’re buying a primary or secondary home, sellers can offer up to 3% of the mortgage price in concessions if you have less than a 10% down payment. The percentage increases to 6% if you have at least a 10-20% down payment, and 9% with a down payment over 25%.

FHA: Sellers can only pay up to 6% in concessions.

VA: Concessions cannot exceed 4% for certain closing costs, including the VA funding fee.

USDA: 6% is the limit for seller contributions.

Don’t Be Greedy

Remember, seller concessions are part of the negotiation process, which means the terms should be mutually beneficial for you and the seller. If your requests are numerous, overly expensive, or ridiculous, it could jeopardize the sale and your relationship with the sellers. The sellers may reject or counter your request; they’re not obligated to accept your proposal. Don’t let the desire to save a buck blind you from what should be your ultimate goal: closing on a home.  

Ask Your Agent

Your real estate agent is your guide and liaison during the homebuying process, so it’s essential to consult with them if you’re interested in asking for concessions. Your agent will have a better understanding of the situation and can assess whether you’re in a good position to ask for seller credits. They can also help you determine whether your requests are reasonable and will create a detailed offer letter to present to the sellers.

Both buyers and sellers can use seller concessions as a bargaining tool to get something they want out of the sale. When used strategically in the right circumstances, they can make each party feel more comfortable about the deal.

If you have any questions about the home buying process, contact one of our licensed Mortgage Loan Originators. If you are ready to buy a home, click here to get started!

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