If you've been saving up diligently to buy a house, you're probably expecting a big price tag for the down payment. But what many people don't expect is the high price tag for closing costs to actually buy the house—usually between 3% and 4% of the purchase price.
For a $350,000 home, you would need an extra $10,500 to $14,000 after a down payment for closing costs. Using seller concessions can help trim these costs, but you won't be able to use them in every market. There are also limits and consequences to using them.
Fees You’ll Pay at Closing
In general, you'll be expected to pay several different fees when you buy a house. These are collectively called "closing costs." They may vary depending on where you live and other factors. Here's a summary of some common closing costs:
- Appraisal fee: This pays for a professional to estimate how much the home is worth.
- Home inspection: This important report details the condition of the home, and identifies any repairs that it may need.
- Title insurance: This insurance protects you from someone contesting the title—say, because of an error—and derailing the sale.
- Escrow: This is a reserve fund that covers, for example, the first three months of taxes and insurance.
- Points: You can pay to lower your mortgage rate by a certain amount of "points," which make your loan cheaper overall.
- Recording fee: This covers the cost to have the official title transfer recorded in local government records.
- Realtor commissions: This pays for the cost of hiring your Realtor.
How Seller Concessions Work
The high price of closing costs can be a barrier to buying for some people. If that's the case for you, consider asking the seller to help pay some of the closing costs. This is asking for "seller concessions."
Your Realtor can help you write an offer asking for seller concessions, although this strategy can be risky. Asking for seller concessions generally works best when it's a buyer's market, when a homebuilder is selling a home, or if a seller is desperate to sell their home. If it's a seller's market, a seller may get several offers on a home. If that happens, your offer asking for concessions may fall to the bottom of the list in favor of hassle-free offers.
Sellers may agree to pay some of the closing costs outright. More commonly, they'll raise the sale price to cover the additional expense. In that way, you still end up financing the closing costs yourself, only through your mortgage instead of upfront.
For example, if the seller agrees to pay $25,000 in closing costs, but also raises the price of the home from $500,000 to $525,000, then you're paying a larger mortgage. If you take out a 30-year loan at a 3.5% APR, then you're actually paying an extra $12,330 in interest from those financing costs over the life of the loan. This is one of the biggest downsides of seller concessions—they can be very expensive.
Concession Requirements for Different Loan Types
One important thing to keep in mind is that you can't ask for more seller concessions than you'll actually owe. For example, if your closing costs are $3,000, you won't be able to ask for more than that. Depending on the type of mortgage, you might have other limits on how much you can ask for as well:
|Conventional Loan to Buy Your Primary Residence|
|If your down payment amount is:||The maximum seller concessions for your loan are:|
|0% - 10%||3%|
|10% - 25%||6%|
|Other Loan Types|
|If your loan type is:||And your down payment amount is:||The maximum seller concessions for your loan are:|
|Conventional loan to buy an investment property||Any amount||2%|
|FHA loan||Any amount||6%|
|VA loan||Any amount||4%|
|USDA loan||Any amount||6%|
The reason that lenders limit the number of seller concessions you can have is to keep home prices from artificially inflating. You and the seller could work out a deal where they'd pay you $50,000 cash in exchange for bumping the house price up by the same amount, for example. In that case, you'd get cash in your pocket and the home price would be artificially high, negatively affecting future buyers.
Alternatives to Seller Concessions
If you don't have enough cash saved up to cover closing costs and you are in a seller’s market, you do have some alternatives to seller concessions. Here are a few examples:
- Look into low-down-payment loans: FHA, USDA, and VA programs require very low (or even no) down payment. While more expensive in the long run, this loan type could free up some of your down payment money to pay for closing costs.
- Consider first-time homebuyer programs: Many first-time homebuyer programs offer financial assistance toward your down payment. Again, this could free up some of your cash for closing costs.
- Save up more first: If you're able to wait, the best option might be to save up more money so you can afford closing costs without seller concessions.
- Buy a cheaper house: If you purchase a cheaper house, you'll likely have fewer closing costs to pay.
The Bottom Line
Asking for seller concessions can help you afford to buy a home sooner. But remember, it's just that: an ask, and a big one at that. Seller concessions only generally work in a buyer's market. And if you do get a seller concession to help you afford a home now, be prepared to pay more over the long run.
Frequently Asked Questions (FAQs)
How do I write an offer with seller concessions?
Your realtor will write the offer asking for seller concessions. They'll ask for a certain percentage, typically 3%, which the seller can choose to accept, decline, or counteroffer.
What can seller concessions be used for?
Seller concessions are when a seller agrees to pay some of the closing costs so that you can buy their home. They can be used to pay for a wide range of closing costs. For some types of loans, such as VA loans, sellers are required to pay for certain closing costs, such as Realtor's commissions.
How do seller concessions affect the sales price?
Generally, a seller raises the price of the home by the amount of the closing costs that they'll be paying. You need to be careful here because a bank generally won't fund a mortgage that's worth more than the house itself. So not only will you need to stay under mortgage-specific seller-concession limits, you'll need to keep the overall home sales price at or below what the appraisal says it's worth, too.