How seller concessions can get you into your dream home

Seller-paid costs reduce your upfront payment by rolling it into your loan.

Elissa

Elissa Suh

Published February 17, 2020

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KEY TAKEAWAYS

  • You can only use seller concessions to help pay for closing costs and certain prepaid expenses

  • Seller-paid closing costs are limited by loan type and the size of your down payment

  • Closing costs average 2% to 5% of the loan principal

There are many added costs to buying a home, including appraisal and inspection fees, homeowners insurance, and property taxes. Homebuyers are required to pay these closing costs and expenses at the end of the homebuying process when they sign the purchase agreement. But closing costs can set you back thousands of dollars. That’s a lot of money to pay upfront, in addition to your down payment.

Buyers can actually request that the seller pay closing costs for them. These seller concessions, also known as seller contributions or seller assists, reduce the buyer’s mortgage closing costs, which are then rolled into their mortgage loan. How much you can get in seller concessions depends on a few factors, including the loan type, loan program, and the size of your down payment.

Seller concessions can come in handy when you want to purchase a house and don’t have enough cash on hand for closing. They’re also good for the seller because they allow the seller to close on the sale faster. But seller-paid closing costs will add to the overall cost of your mortgage.

Whether you’re a first-time homebuyer or a veteran of the housing market, keep reading to learn more about how seller concessions work, how much you can get, and whether or not it’s a good idea.

In this article:

How do seller concessions work?

Let’s say you put in a purchase offer for $400,000 with closing costs of 3%, or $12,000. The seller agrees to pay for mortgage closing costs, or concedes to them.

The seller does not give you the money directly, which would be illegal. Rather the seller concessions are rolled into your mortgage, and the final sale price of the home will be adjusted to reflect the seller-paid costs. Instead of buying a $400,000 house and paying $12,000 in cash, seller concessions make it so that you’re buying a $412,000 house and paying it over time, as part of your monthly mortgage payment.

What can you use seller concessions for?

Seller concessions can only be used to pay closing costs like:

(You can see a more in-depth list of closing costs here.)

Seller concessions can also cover prepaid expenses, like property taxes and insurance premiums for homeowners insurance or private mortgage insurance, which the buyer typically sets aside in an escrow account.

Closing costs can vary based on your location, lender, and type of loan or loan program. Homebuyers typically receive a summary of their closing costs during the mortgage process, so it’s important to shop around for different lenders if you think the closing costs will be unaffordable.

The seller may be willing to concede on some of these costs, and not others. Consult with your real estate agent to learn more about what’s typical in this situation given the circumstances.

Government-backed loans may be subject to more restrictions regarding how you can use seller concessions. For example, seller concessions for VA loans are only used to pay the VA funding fee, and debts and judgments accrued by the buyer.

You cannot receive the seller concession as cash back; the concession only decreases the amount you have to pay up front. Seller concessions can’t cover your down payment either, which determines how much you can get in seller-paid costs.

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How much can you get in seller concessions?

Seller concessions make it so that you don’t have to come up with as much money to buy a house. The seller concessions can’t be more than your closing costs and, remember that the seller isn’t obligated to concede anything. The government also sets a limit on how much a homebuyer can receive in seller concessions.

For a conventional loan for your primary or secondary residence, the most you can get in seller concessions depends on how big your down payment is. The smaller the down payment, the lower the seller concessions.

The maximum seller concession limit for a conventional loan is:

  • Up to 3%, when you put 5% down
  • Up to 6%, when you put 10% to 25% down
  • Up to 9%, when you put 25% down

For FHA loans and USDA loans, seller concessions will only pay for up to 6% of closing costs.

For a VA loan, you can get up to 4% in seller concessions.

If you’re planning to buy an investment property, and not a primary residence, seller concessions are even further capped to 2% of closing costs.

Are seller concessions good?

If you’re selling a home, then offering seller concessions can help you find a buyer more quickly.

If you’re a homebuyer, asking for seller concessions might make your search a little longer, because your offer might be less attractive to the seller. The likelihood that a seller agrees to concessions depends on the market (the supply and demand for houses) and adjusts accordingly. A real estate agent should be able to give you some insight into the local real estate trends and help you make a reasonable purchase offer.

Seller concessions can benefit buyers because they won’t have to bring as much earnest money to the deal. Buying a house is very expensive, so reducing costs can help a lot.

However, the downside to a seller concession is that the money you don’t pay up front in closing costs gets added onto your mortgage loan — and a larger loan means more money and interest you have to pay back over time.

Take a look at the chart below, which illustrates how much you’d pay with and without a seller concession for a 30-year conventional loan. We got the figures using our mortgage calculator, which can show you how much house you can afford. (The monthly payment does not include private mortgage insurance.)

Without concessionsWith concessions
Purchase price$400,000$412,000
Seller concessions %none3%
Seller concessions amount$0.00$12,000
Down payment (5%)$20,000$20,600
Loan amount$380,000$391,400
Interest rate3.65%3.65%
Monthly payment$1,738$1,791
Cost of concessionsN/A$53.00
Total cost of mortgage$624,066$642,788

As you can see, seller concessions would add $53 to your monthly payment. While this may not seem like much, over the lifetime of the loan you’ll wind up paying almost $19,000 more.

Whether or not you should get seller concessions depends on your circumstances and financial situation. Many homebuyers, especially those who are cash poor, would not be able to purchase a house without the help of seller-paid closing costs.

Learn how you can buy a house this year.

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