It’s amazing how many things can go wrong when you’re trying to buy a home. First, you might struggle to get preapproved for a mortgage or to pay for a down payment. And then when you’re nearing the closing table, a final home inspection could reveal something that needs to be fixed. If money is the main issue standing between you and your dream home, you might be able to seal the deal with a seller concession. Consider working with a financial advisor as you make plans to buy a home.
How Closing Costs Work
Before we talk about seller concessions, let’s review how closing costs work. In order to close on a home, an aspiring homeowner will usually need to pay for a certain amount of closing costs. These expenses usually make up between 2% and 5% of the home’s market value, but how much a potential buyer will actually have to pay will vary depending on the situation.
If you have a good relationship with the parties involved in the home sale, some of these costs – such as the loan origination fee or the commission for the real estate agent or broker – can be negotiable. If that’s not possible, however, you can try asking for a seller concession.
How Seller Concessions Work
A seller concession is a gift that a seller can offer a potential buyer to reduce the cost of buying a home. The money from the seller can then be put toward closing costs or homeowners association fees. Or, if a homebuyer discovers that something is broken or not up to code during the inspection, the seller can agree to cover the cost of that repair.
In some cases, a seller can offer a future homeowner access to a special deal like an all-expense paid vacation. Whatever it is, seller concessions can significantly lower the amount future homeowners have to pay out of pocket.
In fact, a seller concession can be beneficial to both buyers and sellers. The buyer owes less money overall and might qualify for a tax deduction. Meanwhile, a seller has the opportunity to sweeten the deal on a home that they’re having a difficult time selling.
Homebuyers can receive a seller concession even if they have an FHA, VA or USDA loan. There are rules, however, that set limits on the maximum amount that a seller can hand over. When a buyer has an FHA loan, for example, sellers generally cannot contribute more than 6% of a home’s sale price to cover the closing costs.
Seller Concessions in Buyers’ Markets vs. Sellers’ Markets
In a buyer’s market, homebuyers have the upper hand because there are many homes available that sellers are desperate to unload. Since the supply of houses is higher than the demand, buyers can more easily convince sellers to lower their home sale prices. The opposite situation is called a seller’s market, when there are more buyers but fewer homes to sell.
Seller concessions can be used in both buyer’s markets and seller’s markets, although they’re more likely to be granted in buyer’s markets. In a seller’s market, a buyer who requests a seller concession might lose the home he or she wants to another person who’s willing to put more money on the table.
Why a Seller Concession Could Be a Bad Idea
Seller concessions sound appealing, especially from a buyer’s point of view. But there’s a catch. While a seller concession might seem like free money, those funds usually get added onto a home’s sale price.
In other words, closing costs are usually rolled into a buyer’s mortgage loan when there’s a seller concession. The concession covers some (or all) of the closing costs, but makes the loan amount higher. With a 4% concession, a $250,000 mortgage would actually rise to $260,000.
So with a concession, a buyer might actually pay more over time because he or she has a bigger mortgage that could take more time to pay off. In an effort to keep costs low, skipping the seller concession might actually be the better move. In the end, though, you’ll have to make your decision based off of your individual circumstances.
A seller concession can speed up the home-buying process and give a buyer an incentive to commit to a particular deal. If you decide to accept a seller concession as a buyer, it’s best to make sure that all the details of the arrangement are put in writing. You wouldn’t want to lose out on a home because you and the seller weren’t on the same page or you neglected to abide by one of the contract’s terms.
Tips on Home Buying
- Consider working with a financial advisor as you sort through the various ways you can finance a new residence. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s mortgage comparison tool to compare mortgage rates from top lenders and find the one that best suits your needs.
- Our free mortgage calculator lets you quickly estimate your monthly mortgage payment with taxes, fees and insurance.
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