Buying a home means more than coming up with a down payment and affording the mortgage payment each month. You also have to be able to afford the closing costs. With closing costs totaling between 5-7% of your loan amount, that’s no small chunk of change you must come up with to buy a home. Luckily, most loan programs allow the use of seller concessions.
Keep reading to learn what they are and how they can help you.
What are Seller Concessions?
Seller concessions are an agreement between you (the buyer) and the seller. It’s when the seller agrees to pay your closing costs. It could be a fraction of them or the full amount. Conventional, FHA, VA, and USDA loans all allow this situation.
You negotiate the seller paid closing costs after you negotiate the home price. Once you agree on a price, you can then ask the seller to raise the price in order to cover the closing costs. In exchange, the seller agrees to credit you the amount that you raised the selling price. This money then goes towards your closing costs.
Please note, however, that you can only raise the bid as high as the value of the home. No lender will give you a loan that exceeds the home’s value. Plus, most loan programs require some type of down payment, even if it is as small as 3.5% on an FHA loan.
In addition, the seller concessions can only cover the amount of the closing costs. You cannot use the excess to put cash in your pocket at the closing. The only use for the credit is to cover the closing costs.
As we discussed above, the most common use for seller concessions is to help cover the closing costs. However, it’s not the only use. You may also use them for:
- Pay for homeowner’s association dues at the closing
- Cover the cost of the repair of something uncovered during the inspection
- Cover the cost of prepaid items, such as taxes, insurance, and mortgage interest
- Cover the cost of funding fees (VA, FHA, and USDA loans)
- Take advantage of a discount point to lower your interest rate
Under no circumstances can you receive cash in hand, so be careful when negotiating the amount of the concessions. While it sounds like ‘free money’, it actually costs you more in the end.
How Seller Concessions Work
When you negotiate a higher sales price with the seller, you take a higher loan amount.
Let’s say you initially negotiated a $150,000 sales price, but know the home is worth $170,000. You ask the seller to cover your $10,000 in closing costs and they agree. This means you pay $160,000 for the home rather than $150,000. If you have FHA financing, you can put 3.5% down, which means $5,600. That leaves you with a $154,400 loan.
If you didn’t ask the seller to help with the closing costs, you would have taken a $144,750 loan amount. The higher loan amount means $9,650 borrowed and 30 years of interest on that amount. So while it looks like the seller is paying your closing costs, essentially you are paying them with interest.
Seller Concessions Cannot be Used for a Down Payment
One way you cannot use seller concessions is for a down payment, though. If you don’t have the money to put down on a home, you may have to ask for a gift from a relative. Gift funds are an acceptable source of funds for a down payment. Money from the seller is not as the seller is an interested party. It could be used as an inducement to purchase which is illegal in the real estate industry.
In the end, seller concessions can help you buy the home you want. It’s a way to get your closing costs covered, but really at your own expense. If there’s room in the home’s value and you really want the home, consider asking the seller to help you out. Just keep in mind that it will cost you more in the long run, especially if you keep the loan outstanding for 30 years.