Sometimes the cost of closing on a home purchase can be overwhelming. Not only do you need money for the down payment, but you need between 3% and 5% of the home’s value for closing costs. If you can’t come up with enough money for everything, you may be able to ask the seller for help with seller concessions.
What are Seller Concessions?
Technically, seller concessions are funds a seller gives you to help you pay your closing costs. In some cases, though, they are funds that the seller provides to help you cover the cost of repairs. This is a common scenario when something is wrong with the home and the seller doesn’t want to use the time or resources necessary to fix it before the closing.
Before you negotiate seller concessions into your loan contract, learn the maximum amount allowed by each loan program:
- Conventional loans – 3% of the purchase price of the home if you put 10% or less down on the home. The amount increases to 6% if you put between 10% and 25% down on the home.
- FHA loans – 6% of the purchase price of the home no matter how much you put down on the home
- VA loans – 4% of the purchase price of the home plus the cost of reasonable and customary closing costs
- USDA loans – 6% of the purchase price of the home
These limits only apply if the appraised value is as much as or higher than the sales price of the home. If you agree to pay more than the price of the home, the limits are calculated based on the value of the home.
Common Seller Concessions to Request
Every situation will differ, but below are some of the most common and reasonable concessions to ask a seller for when buying a home:
- Repairs to make the home functional – If there’s something wrong with the electrical system, plumbing, or roof, it’s safe to ask the seller for concessions. This, of course, only applies if the home passes the appraisal. If the appraiser doesn’t think the home is safe, a lender won’t give you a loan for it. If the repairs are something that doesn’t affect the home’s value but may affect your use of the home, though, it’s reasonable to ask for help with it.
- Closing costs – First-time homebuyers are often shocked at the amount of closing costs they have to pay. If it makes the loan unaffordable, a seller may be willing to step in and pay some or all of the closing costs to make the purchase possible for you. It’s a win-win for both sides of the equation.
- Discount points – If you are going to stay in the home for the long-term, you may want to ask the seller to pay your discount points, if you don’t have the cash to do so. This will help you get a lower interest rate, which will save you money over the life of the loan.
- Real estate taxes – The taxes on a home can be another reason you need an excessive amount of cash at the closing. If the taxes make the house unaffordable because of the combination of closing costs and the down payment, the seller may be able to help.
Keep in mind, seller concessions ultimately increase the price you pay for the home. All sellers have a ‘bottom line’ figure they want for the home. If you ask for concessions, they may agree, but will increase the price of the home accordingly. Of course, they can only increase it as much as the value of the home or they risk your ability to secure financing.
What this means for you is a larger loan amount. You essentially borrow the money that the seller ‘gives’ you. With a higher loan amount, you have a higher mortgage payment and pay more for the loan over its entirety. If this is your ‘forever’ home, though, it may make sense to do so because you’ll be able to afford the costs of closing and/or repairs that make the house a home for you.