When you are trying to buy a home, you have to account for many costs outside of the actual cost of the home. Closing costs can run you as much as 5% of the loan amount. Plus you have to cover your portion of the real estate taxes, homeowner’s insurance, and homeowner’s association dues. Combine that with
your down payment and you have a nice chunk of change you have to save up. If you can’t come up with the total amount of the closing costs, you may be able to get able with seller concessions.
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Seller Concessions Defined
When a seller gives you money (not literally) at the closing, it’s called seller concessions. The seller takes money from their profits and puts it toward your closing costs. The transfer happens on paper and helps to decrease the amount of money you (the buyer) must bring to the closing table. It also decreases the amount the seller walks away with at the end of the closing.
The seller may offer concessions for a couple of reasons:
- If you negotiate it into the contract because you can’t afford the closing costs
- If there is something wrong with the home and the seller would rather give you a credit than fix it themselves (assuming the home still passes an appraisal)
The seller concession is not a gift. That would be considered an inducement to purchase. When done right, it’s a perfectly acceptable way for the seller to help the buyer purchase their home.
How much money the seller gives you will depend on the bottom line number they want to reach. In some cases, they may raise the purchase price of the home in order to give you the concession. In other cases, they will already have the number built in their head and will be willing to concede some of the money to help you buy their home. The one thing to watch when
negotiating the price and concessions is the appraised value. You cannot offer to pay more for the home than it’s worth. No financing program will get approved if this occurs.
How Much can a Seller Provide?
The amount of seller concessions a seller can provide depends on the chosen loan program:
- Conventional loans – 6% of the loan amount if you borrow between 75% and 90% of the home’s price; 3% if you borrow more than 90% of the home’s price; and 9% if you borrow less than 75% of the home’s price.
- FHA loans –6% of the loan amount
- VA loans – 4% of the loan amount
- USDA loans – 6% of the loan amount
No matter the loan program, though, the maximum amount a seller can provide is the total cost of the closing costs. If that means less than 6% of the loan amount in the case of an FHA loan, then you can only receive as much as the
total closing costs.
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What Fees can a Seller Pay?
Most loan programs don’t dictate the actual costs the seller can pay. If a seller is willing to contribute money, they can cover any of your closing costs as long as it’s doesn’t contribute to the down payment. The down payment money must be your own money or money received as a gift and approved by the lender.
Before you accept seller concessions, though, it’s important to discuss it with your lender. Some lenders have different restrictions. For example, some lenders require that borrowers pay for their own credit check or application fee, if applicable. Because each lender can set their own requirements, you must determine what your lender requires before moving forward.
How to Get a Seller Concession
The bigger question is how do you get a seller to help you with the closing costs? It all comes down to negotiations. A very important factor in being able to accept seller concessions, though, is putting it in writing. It has to be in your purchase contract at the time of signing. In other words, as a part of your negotiations to buy the home, you must include the need for help with the closing costs.
If the seller agrees to help you, he/she will put the amount or percentage they are willing to provide in the contract. This way the lender can review the amount/terms to make sure it meets the program’s guidelines as well as their own guidelines.
How Sellers can Do This
In the end, the seller walks away with the same amount of money whether they give you seller concessions or not. If they do agree to help you, chances are that you will bid a higher price on the home (as long as the home is worth it) and then the seller will ‘concede’ the extra money to you in the form of a credit. The seller still gets the same price that they wanted for the home.
Keep in mind, though that you walk away with a larger loan amount. So give it careful consideration before asking for help from a seller. If this is your long-term home, it might make sense to get the help and pay the closing costs over time. If this is a short-term purchase, though, finding a home you can pay the closing costs in cash may be a better option so you don’t needlessly pay interest on costs that you won’t see the full value of before moving.
Seller concessions are a great way to help you buy the home you want as long as it makes sense to do so. Not all sellers are willing to help, though, so have your negotiation skills ready so that you can get the help you need to buy the home of your dreams.
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