What are seller concessions?
As we shift out of a seller’s market, seller concessions are a possibility for homebuyers.
For the past two years, we’ve been in a strong seller’s market. Homebuyers have been doing anything they can to get noticed. But today, the market is moderating in many areas, as rising mortgage rates curb extra-high levels of buyer demand.
Seller concessions may be making a comeback
Now, home sellers are willing to be more flexible. Many are agreeing to seller concessions—when a seller pays part of a buyer’s closing costs. Seller concessions, or seller contributions, aren’t something you would’ve seen a year ago, a time when bidding wars were everywhere, and sellers had their pick of competitive offers.
Here’s how seller concessions could be helpful to you as a homebuyer:
- Asking a seller to pay concessions could help lighten your load in a buyer’s market.
- A seller may offer to pay some of your closing costs to close the deal, reducing the amount of cash you need to purchase.
- You can use seller concessions toward all closing costs, lender fees, points, appraisals, and any other expenses, except for a down payment. (Get six ideas to help fund your down payment here.)
The percentage of seller concessions can also vary by loan type:
- FHA Loan – Allows for 6 percent seller concessions.
- VA Loan – Allows for 4 percent seller concessions.
- Conventional – Allows for 3 percent seller concessions if your down payment is less than 10 percent, 6 percent if your down payment is from 11 to 25 percent, and 9 percent if your down payment is more than 25 percent.
Closing costs may range from 3 to 6 percent of a mortgage. So, seller-paid closing costs have the potential to save a homebuyer thousands of dollars on a typically priced house.
Reach out to an Academy Loan Officer for more affordable homebuying solutions.
Seeing price reductions in your area is a tip-off that seller concessions may be available to you. As many as 40 percent of sellers have started to drop their prices—most of them in former “pandemic hot spots,” like Provo, Denver, Tacoma, Portland, and Sacramento.
When sellers decrease prices, it often means the asking price is too high for the local market. Mortgage rates have increased from their lowest levels, impacting how much homebuyers can afford. The reason almost half of homes are seeing price reductions in some cities is because mortgage rates are rising. This can drag down a seller’s asking price.
If this happens, a seller becomes more willing to negotiate to ensure they sell their house (without having to drop its price any further). Concessions can help both the buyer and the seller. A seller may offer concessions to make their home more appealing. A buyer may use seller concessions to cover some or all of their closing costs, offsetting the out-of-pocket expenses required to purchase.
A seller might also offer concessions so that a buyer will agree to purchase a less-than-perfect house. If a home needs a few minor repairs, for example, seller concessions could reduce closing costs—leaving a buyer with extra cash they can put toward home upgrades. Additionally, a seller may agree to concessions if they want or need to sell their house quickly.
It’s important to note that a seller offering concessions won’t necessarily take this discount off their home’s price. Instead, a seller will increase the asking price of their home by the amount needed to help pay for closing costs and other expenses. However, a deal could fall through if a home’s appraisal comes in lower than this new sales price; mortgage lenders usually never loan more than the appraised value of a house.
Requesting seller concessions might look something like this:
- You find a home you love and work with your real estate agent to submit an offer for $375,000.
- In the offer, your agent requests $6,000 in concessions to cover some of the closing costs on the Conventional Loan you were pre-approved* for.
- The seller counteroffers with an increased home price of $381,000, factoring in the $6,000 in concessions.
- You agree to the counteroffer and soon go under contract to purchase your new house.
As a reminder, seller concessions must be written into a sales contract for them to be legitimate. Concessions also don’t provide any cash back at closing.
In a buyer’s market, seller concessions are usually worth seeking out since they can help lessen or eliminate closing costs and make homeownership more affordable. But there are times when asking for concessions can count against you. This normally happens in a seller’s market when sellers have multiple offers to choose from. Your agent can advise you on local market conditions and when requesting concessions is right.
Could seller concessions help cover your closing costs?
It’s possible that concessions could reduce some or most of your upfront cost of buying a house, depending on your local market. For many homebuyers, this may make it easier to purchase. Get in touch to find out.
*Pre-approval is not a commitment to lend. This is for informational and educational purposes only and not intended as an advertisement as defined by Regulation Z. Please consult a trusted professional as personal circumstances may vary. No specific results are guaranteed. MAC723-1482229.