Seller Concessions: What They Are and How They Work

When researching the home-buying process, you’ll come across some unfamiliar terms. One thing you may be asking yourself is, “What does ‘seller concessions’ mean?”

Luckily, seller concessions are good news for buyers! They can cut down on the cost of homeownership and serve as a powerful negotiating tool when you’re buying a home. If you’ve ever wondered, “What are seller concessions?” “How do seller concessions work?” or “Can seller concessions be used for a down payment?” we’ve got the answers.

What is a Seller Concession in Real Estate?

A seller concession is part of the negotiation that takes place during a real estate transaction. With seller concessions, the seller agrees to pay for some of the buyer’s closing costs or other expenses related to the home purchase. Seller concessions can include everything from loan origination fees to prepaid property taxes.

Seller Concession Examples

What are seller concessions that are typically made on a real estate transaction? They fall into three general categories:

Closing Costs

Closing costs are the fees that are due when a real estate deal is finalized and title is transferred to the new owner. Seller concessions in this category include:

• Loan origination and processing fees.
• Title insurance and escrow fees.
• Home inspection and appraisal costs.
• Attorney’s fees.
• Recording fees and transfer taxes.

Prepaid Expenses

Prepaid expenses are costs that the seller paid in advance, often for the entire year. Under normal circumstances, the buyer compensates the seller for the proportion of the year that they will own the house, but this repayment could be waived as part of the seller concessions. Common prepaid expenses are property taxes and HOA fees.

Home Improvements

Certain home improvements can qualify as seller concessions. These can include doing necessary repairs, giving the buyer credit toward repairs or appliances, and offering a home warranty.

How Do Seller Concessions Work?

Seller concessions are negotiated when you make your initial offer or counteroffers. You and your agent may have some concessions in mind before you even make an offer, while others may come up following the home inspection. Expect to go back and forth with the seller over the course of the negotiation.

Seller concessions are written into the purchase contract, where they become legally binding on the seller. In some cases, concessions have to be met before closing, and in other cases, the seller fulfills them at closing. If the concessions are credits due to you, you’ll get them in the form of reductions in the amount you owe at closing.

Although this may sound complex, it’s a regular part of most real estate transactions, and your real estate agent will be accustomed to handling them and following up to make sure they’re fulfilled.

Seller Concession vs Price Reduction

Although seller concessions are effectively a reduction in what you owe at closing, they’re not the same thing as a price reduction on the home. Here’s the difference:

• Seller concessions keep the purchase price of the home the same but can help with immediate cash needs at closing. They don’t, however, change the size of your mortgage.
• A price deduction lowers the home’s purchase price and reduces the size of your mortgage. That saves you money over the course of your loan because you’ll be paying less mortgage interest.

In terms of strategy, seller concession vs price reduction depends on your financial situation. If you’re short on closing costs but can handle the monthly payment, concessions might be better. If you want to minimize your long-term debt, a price reduction could be more beneficial.

Can Seller Concessions Be Used for Down Payment?

No, seller concessions can’t be used for the down payment directly; buyers are required to fund the minimum down payment themselves for both conventional and government-backed loans.

However, seller concessions can be used to cover out-of-pocket costs such as closing fees, title insurance, appraisal and inspection fees. By using seller concessions to pay some of these costs, buyers retain more of their own money, which frees up room in the budget for the down payment.

Are There Limits on Seller Concessions on FHA Loans?

Yes, for FHA loans seller concessions can be up to 6% of the home’s sale price, but no higher. If the total closing costs are less than 6%, the unused funds can be used to pay other allowable costs.

Are There Limits on Seller Concessions on Conventional Loans?

Conventional loans also place limits on seller concessions, but the maximum depends on the size of the down payment.

• For downpayments under 10%, the maximum seller concession is 3% of the purchase price.
• For downpayments between 10% and 25%, the maximum seller concession is 6% of the purchase price.
• For downpayments over 25%, the maximum seller concession is 9% of the purchase price.

Are There Limits on Seller Concessions on VA Loans?

Yes, but VA loans have special rules. Sellers can pay all of the buyer’s closing costs and offer up to 4% of the purchase price in additional concessions. These extra concessions can cover things like prepaid taxes and insurance, the VA funding fee, or even paying off some of the buyer’s debts.

Are There Limits on Seller Concessions on USDA Loans?

Yes, seller concessions can be up to 6% of the purchase price, applied to the buyer’s closing costs and other allowable expenses.

When to Ask for Seller Concessions

Asking for seller concessions may sound like a no-brainer, but there are times to ask for more and times to pull back.

Seller concessions are most advantageous when:

• You think you could be short on cash for closing.
• It’s a buyers market, and you have little or no competition.
• The home has been on the market for a while.
• The inspection reveals that the home needs significant repairs.
• Comparable homes have sold for lower prices.

In these situations, you may want to hold off on asking for concessions:

• A seller’s market.
• Multiple offers are expected.
• The home is priced below market value.

Whether or not to ask for concessions is a strategic decision. Rely on the judgment and advice of your real estate agent when you go into a negotiation.

Understanding seller concessions meaning and how they work gives you another tool for reducing the overall cost of home ownership. While they’re not right for every situation, they can be very helpful for managing upfront costs. You’ll encounter many unexpected expenses in your home-buying journey, so carefully consider what concessions you might request and what role they can play in your home buying strategy.