Seller concessions allow a homebuyer to “roll-in” closing costs on a purchase home loan. It’s one of the four methods to pay for closing costs.
Seller concessions can pay for all costs associated with the purchase of a home exception of the down payment. The type of loan program, the down payment amount, and the occupancy status all determine the allowable amount of seller concessions.
- Seller Concessions Overview
- Advantages of Seller Concession
- Disadvantages of Seller Concessions
- Risk of Seller Concessions
- Risk: Appraised Value Not High Enough
- Risk: Concessions > Costs
- Timing Of Concessions
Seller Concessions Overview
The buyer and seller negotiate the amount of seller concessions on a purchase contract. The seller concessions reduce the buyer’s cost to close dollar for dollar.
For example, if closing cost total $10,000 for the purchase of a home, and the seller concessions are $4,000, the buyer would only need to bring $6,000 to closing ($10,000 minus $4,000).
Seller concessions are located in Section 12 on TREC’s purchase contract when buying a home in Texas.
Conventional Loans Seller Concessions
- Conventional: Owner Occupied & Second Homes
- Less than 10% down payment = 3%
- 10% down payment or more = 6%
- 25% down payment or more = 9%
- Conventional: Investment Properties = 2%
- Jumbo Loans = 3%
Government Loans Seller Concessions
Government-backed home loans allow higher seller concessions amounts (relative to down payment amount) when compared to conventional loans. Government loans are only for owner occupied primary residences. Government loans do not allow second homes nor investment properties.
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).
Advantages of Seller Concession
Seller concessions reduce a buyer’s funds due at closing. Obviously this is an advantage to the buyer. The seller concessions are effectively “rolling the costs into the loan” so that the buyer doesn’t have to write as big of a check.
Disadvantages of Seller Concessions
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.
For 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).
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 concessions as it may appear more aggressive.
Risk of Seller Concessions
Risk: Appraised Value Not High Enough
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?
Risk: Concessions > Costs
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”.
For example, 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.
Timing Of Concessions
Seller Concessions can be included in a contract amendment if there are re-negotiations after a home inspection).
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.)