What are closing costs & seller concession limits?

When buying a home, most home buyers pay closings costs and fees to cover the costs of getting a mortgage. Closing costs usually range from around 3%-6% of the sale price of the property.

Closing Costs, Defined:

What are Closing Costs?

Closing Costs are fees and expenses a home buyer pays when they close on a house, beyond the downpayment.

Who pays closing costs?

Both home buyers and home sellers pay closing costs. However, sometimes buyers' closing costs are higher than sellers. A home buyer can negotiate with a seller to help cover some of their closing costs as a buyer - also known as Seller Concessions.

What exactly do closing costs consist of?

Costs differ base on location, property and loan type. Some of these costs could include:

• Lender Fees:
  • Mortgage Application
  • Loan Origination
  • Credit Check
  • Home Appraisal
  • Flood Certification
  • Mortgage Discount Points
• Escrow Charges:
  • Homeowners' Insurance
  • Prorated Property Taxes (from the date of closing)
  • Prorated HOA Dues (If applicable, from the date of closing)
• Title & Closing Fees:
  • Title Exam/Closing
  • Title Insurance
  • Recording Charges
  • Property Survey (if applicable)
• Other "Misc." Fees:
  • Broker Administration & Buyer Agent Representation (if applicable)
  • Wire Fees
  • Home Warranty (if applicable)

Can closing costs be avoided?

The answer is, sometimes. Home buyers may be able to negotiate with the seller to pay some of these closing costs ("Seller Concessions") OR structure your purchase agreement to include closing costs in your monthly mortgage payment.

Seller Concessions, Defined:

Seller concessions are closing costs that the seller has agreed to pay on the home buyers' behalf.

Are there limited to Seller Concessions?

In short, yes, there are concession limits. The seller cannot pay all of a buyer's closings costs. How much a seller can contribute depends on the type of loan the buyer is getting as well as a few other factors.

Keep in mind that the total amount a seller contributes cannot exceed the total amount of closing costs. For example: You're buying a home for $200,000 with a conventional loan and 20% down and you end up with a $160,000 mortgage. Using the average closing costs of 6%, the seller could legally contribute $9,600. But if your closing costs for this mortgage are only $5,000, the seller cannot contribute more than $5,000 towards your closing costs.

Why are there limits to Seller Concessions?

What's the point of setting limits on seller concessions? Mortgage rule-makers like Fannie Mae and HUD set limits on seller concessions to discourage inflation in the housing market.

For example: let's say you want to buy a home worth $250,500. The seller offers to sell you the home for $275,000 BUT ALSO give you $25,000 towards your closing costs and you get to keep whatever is leftover. A number of negative consequences would arise:

• You paid too much for the home
• Similar homes in the neighborhood will start selling for $275,000 (and more if the cycle is repeated)
• The bank's loan amount isn't based on the true value of the home

Even though this sounds like a good deal for you, in a very short amount of time property values and loan amounts will reach unrealistic levels. Then, if borrowers stop making their payments, banks and mortgage investors are left holding the bill.

Seller Concession Limits by Loan Type

The restrictions on seller concessions vary by loan type. But this rule is pretty much the sale across the board: The lesser of the sale price of the appraised value usually dictates how much a seller can pay in concessions.

For example: You offer $255,000 for a home. The home appraises at $250,000. If the seller concessions max out at 3%, the seller can only contribute 3% of the appraised value since it's less than the sale price.

Conventional Loans:

The limit for conventional loans depends on how much you're putting down:

• Downpayment is less than 10% of the sale price: the seller can contribute up to 3% in seller concessions
• Downpayment is 10%-25%: the seller can contribute up to 6% in seller concessions
• Downpayment is more than 25%: the seller can contribute up to 9% in seller concessions

However, if a home buyer is buying the home as an investment property, the seller's maximum contribution is limited to 2%, no matter how much the buyer is putting down.

FHA Loans:

• For all FHA loans, regardless of how much is being put down, the seller can contribute up to 6% in seller concessions

USDA Loans:

• For all USDA Loans, regardless of how much is being put down, the seller can contribute up to 6% in seller concessions

VA Loans:

• VA loan rules dictate that the seller can contribute up to 4% in seller concessions. Seller concessions on VA loans may also include the one time VA funding fee.

FAQs on Seller Concessions

What can I use seller concessions for?

Seller concessions go toward your closing costs when purchasing a home.

Are seller concessions common?

Seller concessions can be pretty common, though they occur more often in a buyer's market than in a seller's market.

Can sellers refuse to contribute toward my closing costs?

Sellers do not have to contribute to your closing costs. Any seller concessions must be negotiated into your contract.

Are seller concessions paid out of pocket?

Seller concessions come out of the seller's profit for the sale, so they are not directly paid by the seller out of pocket.

Are seller concessions taxable?

Seller concessions are considered to be sales expenses and are therefore tax deductible.

Is it better to ask for seller concessions or a lower sales price?

It depends on the situation. If you are looking to bring as little liquid cash to closing as possible, then they can be a good option. However, with rising interest rates, sometimes taking the concessions to buy down your mortgage rate can be a better option in the long run. Check out my post about the Seller Rate Buy Down for more information.

Final Takeaway

Seller concessions are closing costs the seller agrees to pay - no more than the percetage dictated by the home's appraisal. They can make a home more affordable for a buyer as well as help the seller close the deal.

Work directly with your mortgage professional to select the best financing options for you. Then work directly with your real estate agent to help you decide whether you have a good opportunity to ask the seller for concessions. If the market is right, you may be able to ask the seller to pay for part of all of your closing costs.

Before you can think about seller concessions though, it's best to start the conversation with both a mortgage professional and a real estate agent. Click Here for a FREE guide to home ownership.