What Are Seller Concessions?

Certified Mortgage Advisor
NMLS 1701021
December 6, 2018

Seller Concessions or Seller Credit

Now, we are talking about Seller Concessions. Sometimes this is called Seller credit. Sometimes it's called Seller Concessions, but really it means the same thing.

What is seller concessions?

Seller concessions are essentially where the seller is going to pay a portion of your closing costs. Now let's note that I said portion here and not all of the closing costs. So what happens is the seller will pay a percentage of the purchase price to go towards the costs that are required for you to close on a property.

What are some of these costs?

We have things like the appraisal. We have title fees, tax insurance, recording fees, everything associated with you closing on a property, and acquiring a loan is going to be the closing cost so the seller will be able to give you a credit if you can negotiate it this way towards those closing costs.

Closing costs and Down payment

So something to keep in mind here is that closing costs will never be able to go towards your down payment. Your down payment is going to be the minimum required investment for a property.

So for instance, let's say you're putting 3% down on property. So if we're putting 3% down and maybe the seller gives you 3% in closing costs they don't equal out. Because what's happening is we have 3% of our down payment. We also have closing costs added on top of that. And then any seller concessions are going to drop it down that number from the top, and it will never be able to cut into the down payment required. So seller concessions only go to pay down a portion of the closing costs.

Seller concessions are limited by loan type

So not all loans have the same amount of seller concessions. For example, investment loans. Most of the time the max percentage of 2% of the purchase price to be used as closing costs conventional most of the time we're seeing that being about 3% of the purchase price towards closing.

Depending on how much you put down with a conventional loan. That number can go up to 6% or 9% closing costs that you can receive from the seller with government loans like FHA and USDA, you can go up to 6%, same thing with a VA as well. You can get 6% of the purchase price to go towards your closing costs.

How it affects your negotiation?

Getting your closing costs paid for is great. But the problem is it affects your negotiation position a little bit. Because if you think, put yourself in the seller's shoes for a second, they're wanting to get the most amount of money from their property as possible. They're already paying for the realtors they're gonna be paying a tax proration to you. Then if you add seller concessions on top of that's more money than they're having to take out of their portion of the equity to close on the property.

So if you come into an offer with 6% seller concessions and another bid comes in for 3%, most likely the seller's going to go with the 3% seller concessions offer because they're saving 3% by, with that deal instead of paying an entire 6% towards your closing costs.

Realtors decides what's best for you

So sometimes the way this is structured is, let's say for instance that you're looking at a house and right now it's listed for $97,000. So one way to do this would be to go and get a mortgage for the property for $97,000. Then, you would have your down payment and closing costs altogether paid right there in full, or you could structure the deal for a hundred thousand dollars and then have 3% seller concessions baked into the purchase price of the property.

So instead of paying $97,000 for the property and the hundred percent total closing costs, you would purchase the property for a hundred thousand dollars and receive 3% to pay down your closing costs. So you kind of bake in that seller concessions. So sometimes dealers structured that way. Sometimes they aren't, it really depends on how you negotiate the contract and what your realtor feels is best for you to be able to win that deal.

Discount points

So something else that you can do with seller concessions is you can pay discount points so you can take the seller credit to go towards the prepaid interest that will buy down your rate. So essentially all rates are given at what's called par and think of it like golf. There is a par rate and we can be over par or under par, and basically, you're given a rate based on your risk factor as a buyer, and if you have a higher risk level, you're gonna get a higher interest rate and a lower risk level is a lower interest rate.

Seller concessions can buy prepaid interest

What we can do with the lenders is actually prepay some of the interest, so that you can drop down your rate in advance. So if you're planning on staying in the property for a long time, a lower, rate's gonna be more savings over the life of the loan. So seller concessions can help you buy down some prepaid interest if you want to. That way you can get a lower rate.

It can offset closing costs

These are all some different options and different factors to consider when you're looking at seller concessions. But the main goal with seller concessions is just to offset closing costs.

Might not cover all the closing cost, BUT

Most of the time seller concessions will not cover all of the closing costs, but they'll usually cover a really good portion enough that most of the time you'll bring your down payment, plus maybe one to 2% of the purchase price and closing costs on top of it.

Talk with your lender or realtor

But the best way to figure out all of the math involved is to talk with your realtor, to talk with your lender, run the numbers with them on a sample property that you're interested in, and run through a couple of different scenarios of what the seller concessions might look like compared to the closing costs of that specific property. So hope this was helpful.

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