Seller Concessions are essentially a way to “roll-in” Closing Costs on a purchase home loan (see also How To Pay For Closing Costs). Seller Concessions are negotiated between the buyer and seller during the contract negotiations and are recorded in Section 12 of the purchase contract. (Note: Seller Concessions can be included in a contract amendment if there are re-negotiations after a home inspection). Seller concessions can pay for most costs associated with the purchase of a home with the exception of the down payment.
Example Of Seller Concessions
Joe Buyer likes Sally Sellers home that is listed for $300,000. Joe thinks he could Sally $297,000 for the home and Sally probably would accept the offer. Instead, Joe Buyer offers Sally Seller the full $300,000 for the home but request $3,000 in seller concessions. Sally accepts this offer because it’s the same bottom line net to her as a $297,000 offer with zero concessions, and Joe now reduces his cost to close by $3,000 (assuming the property will appraise for the $300,000).
The major risk that exists in the aforementioned example is whether the house will appraise for the full sales price of $300,000. Let’s modify the aforementioned example to make a point. Let’s say that Sally Seller won’t budge on her $300,000 list price so Joe had to offer $303,000 to get the $3,000 in seller concessions. In this instance let’s assume that Sally had her home perfectly priced and the appraisal determines the value to be right at the $300,000. This presents a problem. Joe and Sally would now need to determine how to move forward – i.e. does the sales price get reduced to $300,000 with the $3,000 concessions included or does the price stay at $300,000 and the concessions removed?
Seller concession requests should be included at the onset of the contract negotiations. If seller concessions are added later in the process the buyer runs the risk of the appraisal already being completed and a value already determined based off the initial sales price. Plus, amending the contract after the fact may risk an appraiser and/or underwriter viewing the sales price as artificially inflated just to accommodate the concessions. (We realize this may seem “backwards” but trust us, negotiating the concessions up front removes these potential issues.)
The advantages to a buyer for having seller concessions is the reduction of funds due at closing. The seller concessions are effectively “rolling the costs into the loan” so that the buyer doesn’t have to write a check.
The disadvantages of seller concessions are that the monthly mortgage payment is increased as a result of “paying more” for the house. (Remember: if Joe Buyer is buying the home for $300,000 with $3,000 in concessions it means that he could buy the house for $297,000 with zero concessions). The good news is that the extra few bucks a month can be worth the trade off of saving thousands at closing. Example: an extra $3,000 financed on a 30 year loan at 5% is an extra $17 to $18 dollars per month (or about $5 to $6 per $1,000 financed). Feel free to play with our Payment Calculators to determine potential home loan payments.
Another disadvantage of seller concessions is that they may convey weakness to a seller and/or may the offer less competitive. If Joe Buyer is putting down a minimum amount for a down payment and is asking for seller concessions, it may lead Sally Seller to assume that Joe isn’t a very strong buyer. Moreover, if there are multiple contracts on a property then Sally Seller may be inclined to accept an offer without conessions as it may appear more aggressive.
The other “risk” of concessions is a risk for the buyer when purchasing a home. If a buyer request too much in seller concessions then the buyer chances leaving money “on the table”. Let’s say Joe Buyer purchases Sally Seller’s house for $310,000 with $10,000 in seller concessions (and assume the house will appraise for $310,000). Let’s also assume that Joe Buyer only has $4,000 of total costs due at closing. The remaining $6,000 of concessions can’t go towards the down payment and Joe is not allowed to get money back which means Sally Seller would basically keep the extra $6,000. Make sure when negotiating concessions you know what to expect for costs at closing. Our Payment Calculators provide estimated closing costs for what to expect at closing.
Maximum Amount Of Seller Concessions
Every home loan program has a different amount that it will allow for seller concessions. Below are guidelines for the maximum amount of concessions allowed for various programs. Remember that the percentages are based off the purchase price and cannot go towards the down payment. Obviously you’re welcome to call us if you have any questions.
What are the maximum Seller Concessions or Contributions allowed on conventional and jumbo loans? The answer depends on what you plan to buy and how much you plan on putting down. Note: percentages are based off sales price and cannot go towards the down payment.
|Occupancy Type||Loan to Value (LTV)||Max Concessions|
|Primary Residence or Second Home||> 90%||3%|
|Primary Residence or Second Home||75.01% to 90%||6%|
|Primary Residence or Second Home||<=75%||9%|
|Investment Property||All LTVs||2%|
The seller concessions for a FHA home loan is 6%. The seller concessions can pay for the Up Front MIP if desired.
The seller concessions for a VA home loan is 4%.
The seller concessions for a USDA home loan is 6%.