If you’re navigating homebuying for the first time, or even if you’re a seasoned homebuyer, you’ve likely encountered the term “seller concessions.” Understanding this concept is crucial in today’s real estate market. In this blog, we will help demystify seller concessions, explain how they work, and highlight their potential impact on your homebuying experience.
Decoding Seller Concessions: What Are They?
Ever wondered what seller concessions really are? Think of them as a financial helping hand from the seller to you, the buyer.
In essence, seller concessions are agreements where the seller agrees to pay certain costs on behalf of the buyer. These costs could include a variety of expenses such as inspection fees, legal costs, discount points, origination fees, appraisal fees, temporary rate buydowns, title insurance, escrow fees and even prepaid interest and insurance. Sellers often offer seller-concessions in softer markets to make a property more enticing or to just help close a transaction.
How Seller Concessions Work
Seller concessions can be seen as a strategic move in the art of deal-making in real estate transactions. Imagine you’re interested in a home listed for $300,000. You might request a $5,000 concession for closing costs. If the seller agrees, the sale price might be adjusted to $305,000. So, while the price tag sees a slight uptick, you benefit from reduced upfront costs. Alternatively, if the market is soft enough, the seller might agree to a $5,000 concession without adjusting price – with the willingness to net $5,000 at close.
This kind of negotiation is common in both “buyers’” and “sellers’” markets. As a quick aside, a sellers’ market is one in which the supply of homes is very tight, so sellers hold the negotiating advantage. A buyers’ market is one in which there is an excess supply of homes, so buyers hold the negotiating advantage. In any case, concession negotiations in real estate can be tailored to benefit both parties, easing the financial burden for the buyer while also ensuring that the seller achieves their desired sale price.
What Seller Concessions Can Cover
Seller concessions can be a game-changer in managing your out-of-pocket closing costs. Here’s another list of what these concessions might cover:
- Loan origination and appraisal fees
- Temporary rate buydown fees
- Underwriting and loan processing fees
- Home inspections and legal fees
- Title insurance and escrow fees
- Homeowner’s insurance
- Prepaid items like property taxes, mortgage interest and homeowners’ association fees
These concessions can significantly reduce the amount you need to bring to the closing table, making the dream of homeownership more accessible and less stressful.
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April 27, 2024
Limits & Restrictions on Seller Concessions
It’s important to note that seller concessions aren’t without their limits. These restrictions vary based on your loan type.
For instance, with a conventional loan, the max seller concessions might be capped at 3% of the purchase price if your down payment is less than 10%. However, FHA seller concessions can go up to 6%. Knowing these limits is crucial for effectively negotiating seller concessions and ensuring that you’re getting the best possible deal.
Conventional Loans/Conforming Loans (Backed By Fannie Mae and Freddie Mac)
- Seller concessions are capped at 3% of the purchase price if the down payment is less than 10%.
- Seller concessions are capped at 6% if the down payment is between 10% and 25%.
- Seller concessions are capped at 9% if the down payment is 25% or more.
- Seller concessions for investment property loans are capped at 2% no matter what.
FHA Loans
- Allow up to 6% in seller concessions, regardless of the down payment.
VA Loans
- VA seller concessions can go up to 4% of the loan amount.
USDA Loans
- USDA seller concessions are limited to 6%.
- Ideal for buyers with limited funds, as concessions can cover a wide range of expenses similar to FHA loans.
Jumbo Loans (loans that exceed the conforming loan limit for a given area)
- Seller concessions vary for jumbo loans, but are typically capped at either 2% or 3%.
General Restrictions
- Concessions cannot be used for the down payment.
- Total concessions cannot exceed the total amount of all closing costs.
- Any excess concessions must be returned to the seller; they cannot be used to cover non-allowable costs (if any) or given to the buyer as cash back. They also cannot be used for the down payment as mentioned above.
Impact on Appraised Values and Loan To Value Ratios
- Appraisers review purchase contracts and will consider concessions when doing their analyses.
- If appraisers believe a purchase price has been artificially elevated to make a large concession more palatable for a seller, there is a risk that the estimated appraised value might be lower than the purchase price. This would require you (the buyer) to have to bring in extra cash to make up for the appraisal shortfall, offsetting the benefit of the seller-concession.
These limits and restrictions highlight the importance of understanding the specifics of your loan type and working closely with your real estate agent and mortgage expert to navigate seller concessions effectively in your homebuying journey.
Weighing the Pros and Cons:
Like any aspect of buying a home, seller concessions come with their own set of pros and cons. On the plus side, they reduce the amount of cash you need at closing, potentially saving you thousands of dollars.
They can also be a valuable tool in negotiations, particularly if you have extra leverage in a buyers’ market scenario. However, be mindful that higher concessions might lead to a larger loan amount, if the price of the home was increased to accommodate the concessions. Large concessions can also result in appraisals coming in under the contract price. It’s all about finding the right balance that suits your financial situation and real estate goals.
Pros of Seller Concessions:
- Reduces Upfront Costs: Seller concessions lower the amount of cash needed at closing, easing the initial financial burden of homebuying.
- Savings on Closing Costs: These concessions can cover various closing costs, potentially saving buyers thousands of dollars.
- Negotiation Tool: Seller concessions offer a valuable bargaining chip, especially useful in negotiations with a stubborn seller (clinging to a specific price) or with any seller in a buyers’ market.
- Flexibility in Financial Planning: By reducing immediate out-of-pocket expenses, buyers can reserve funds for move-in and home improvement costs.
Cons of Seller Concessions:
- Increased Loan Amount: Higher seller concessions can result in a larger overall loan amount, affecting long-term financial commitments.
- Limits Based on Loan Type: Different loans have varying limits on seller concessions (e.g., max seller concessions conventional, FHA seller concessions), which can restrict flexibility.
- Impact on Appraised Value: As mentioned above, appraisals can come in low if concessions are too large.
Understanding these pros and cons helps in making an informed decision when considering seller concessions during the homebuying process.
JVM Lending: Your Partner in Understanding Seller Concessions
At JVM Lending, we’re committed to making your homebuying experience as smooth and understandable as possible. Whether you’re curious about guidelines or need advice on navigating a sellers’ or buyers’ market, our team is here to guide you. Our expertise in understanding the intricacies of different loan types and real estate trends ensures you have all the information you need to make informed decisions.
Remember, buying a home is a significant step, and understanding concepts like concessions can make a big difference. If you have more questions about how seller concessions work, we’re here to help you every step of the way in your home-buying journey!
Reach out to JVM Lending with any questions at (855) 855-4491 or [email protected]. If you are ready to start your homebuying journey, you can start by filling out and submitting JVM’s loan application.
