What Are Seller Concessions?

How do seller concessions work in real estate?

Seller concessions are incentives from the seller to make the home purchase a better deal for the buyer. For instance, the seller may agree to cover the origination fee on the mortgage, which is typically 0.5% to 1% of the loan amount.

Depending on the type of loan, there are limits to how much the seller can offer in concessions. There are also other limitations, like which costs the seller can cover. Usually, they can cover closing costs, which include attorney fees, appraisal costs, inspection fees, origination fees or prepaid property taxes.

Types of seller concessions by loan program

Seller commissions generally have certain limitations, which vary by loan program.

Seller concessions for conventional loans

Conventional mortgages are loans offered by private mortgage lenders, such as banks and credit unions. Allowable seller concessions for conventional loans typically depend on the amount of the down payment:

• Below 10%: Concessions are limited to 3%
• Between 10% and 25%: Concessions may increase to 6%
• Higher than 25%: Up to 9% in concessions allowed

With conventional loans, sellers may offer between 3% and 9% of the purchase price in concessions, depending on a buyer’s down payment.

So, if you plan to buy a $250,000 house with a 5% down payment ($12,500), the seller can offer concessions up to $7,500, which is 3% of the purchase price.

FHA seller concessions

Federal Housing Administration (FHA) loans are backed by the federal government through the U.S. Department of Housing and Urban Development (HUD) and offered by FHA-approved lenders. Regardless of the down payment amount, the seller can contribute up to 6% of the purchase price in concessions if the borrower uses an FHA loan for financing.

VA seller concessions

Veterans Affairs (VA) loans are mortgage loans for active-duty and veteran military service members and their eligible family members. With a VA loan, the buyer may receive seller concessions of up to 4% of the total loan amount (not the purchase price), but those concessions can’t cover loan discount points. These concessions can cover the VA funding fee (based on your down payment amount), appraisal fee and title insurance.

What to consider about seller concessions

Mortgage concessions can benefit both the buyer and the seller in a real estate transaction. The seller may be able to sell the home to a preferred buyer if they offer specific concessions, which can make a deal much more enticing.

Buyer’s market vs. seller’s market

Seller concessions are more common in a buyer’s market, which is when the available supply of homes is greater than the demand. In these cases, homes could sit on the market for weeks or months before selling. If a seller offers concessions to make a home more appealing, it could result in a quicker sale, and the buyer will save money (sometimes thousands of dollars).

However, in a competitive seller’s market, asking for seller concessions could make a buyer’s offer less attractive to sellers. A seller’s market is when demand for housing is high but the available housing stock is low.

Closing cost concessions may mean a larger loan for buyers

Some buyers ask for concessions to reduce the cash they must bring to the table at closing. They may offer a higher purchase price in exchange for the seller paying a portion of the closing costs. But this could mean taking out a larger loan amount, which translates to paying more interest in the long run.

» MORE: How much are closing costs?

Sellers may need to pay commissions

According to Jonathan Key, a real estate broker with eXp Realty, paying a higher purchase price in exchange for concessions has some disadvantages for the seller. The seller will have to pay real estate commissions on the higher purchase price, and if the home doesn’t appraise at a higher price, the deal could fall through.

When to ask for seller concessions

The prevailing housing market plays a big part in the choice to negotiate seller concessions. As a general rule, sellers are less likely to consider concessions in a seller’s market. Still, when you negotiate seller concessions, keep in mind what’s fair for both parties.

In most cases, you’ll want to request seller concessions upfront, before your purchase offer is accepted.

When a home has been listed long term with no offers

Most concessions have to be written into the offer and presented upfront before the seller accepts the offer. Your real estate agent can help you decide if concessions are appropriate given the circumstances. For example, if a home has been listed for months with no offers, you may decide to ask for concessions.

When a home inspection reveals costly repairs

However, it’s possible to ask for a seller credit later, after your offer is accepted and you begin the closing process.

For instance, if the home inspector finds several costly issues, like the home needs a new roof or the heating, ventilation and air conditioning (HVAC) system needs to be repaired, you can ask for a seller credit to cover part of the costs you’ll incur by getting those items repaired or replaced after the sale. A seller credit essentially reduces the amount of cash you have to bring to closing but it doesn’t lower the purchase price.

In some cases, requesting concessions after the closing process has begun works out. The seller may be willing to do what it takes to seal the deal at this point. They might worry that $10,000 worth of repairs will result in your backing out of the deal, so they might be willing to offer some kind of credit. And relisting a home isn’t only a hassle, but it can also affect future offers. Potential buyers may see a sale falling through as a red flag.

» MORE: How much to offer on a house

Bottom line

Seller concessions can offer a mutual benefit for buyers and sellers in a real estate transaction. But it’s essential to consider your particular circumstances when asking for a concession. Your agent may not recommend asking for concessions if you’re in a seller’s market and there’s a lot of competition.

However, it may be appropriate to ask for a concession if the home is overpriced compared with similar homes on the market in your location. Overall, concessions could make or break a deal, so make sure to be strategic with your requests.