September 19, 2021

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Seller Concessions: How to Get Your Closing Costs Paid For

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Home buyers are sometimes surprised at how much money they have to close. In addition to the down payment, you’ll need to pay a long list of closing costs – including an issuance fee, title insurance, and more – before you can get these house keys.

Seller concessions, also known as sales assistant, make these expenses less burdensome for you.

Here’s what you need to know about seller concessions:

What are seller concessions?

Seller concessions are when a seller agrees to pay part or all of the buyer Closing costs.

However, “payment” is a misnomer to how this Agreement works. The seller doesn’t really pay anything – they just put the closing costs in mortgage and increase the selling price to make up the difference.

The closing cost is what you need to pay to complete the home loan and sale. They include:

  • Origination fee
  • Mortgage points
  • Title insurance
  • Property taxes
  • Transfer tax
  • Appraisal fees
  • Escrow fees
  • Inspection fees
  • Admission fees
  • Survey fees

The closing costs together usually amount to 2 to 5% of the loan amount. That means a $ 250,000 mortgage typically costs between $ 5,000 and $ 12,5,000 in closing costs.

The main reason sellers usually offer concessions is to sell the home faster.

Learn more: How much does it cost to buy a home?

This is how seller concessions work

For example, let’s say you want to buy a home for $ 300,000. You plan to deposit $ 50,000 and take out a mortgage for the remaining $ 250,000.

However, they are worried about having enough cash to cover your closing costs, so ask the seller for a 5% discount – $ 12,500. The seller agrees to the concession and you roll it into your mortgage.

To make up the difference and gross the full $ 300,000, the seller will likely increase the sale price by $ 12,500 – in this case from $ 300,000 to $ 312,500.

You would then need to increase your loan amount from $ 250,000 to $ 262,500. In the end, you essentially finance the concession over the life of the loan.

Closing costs that a seller can cover

Lenders limit the items eligible for franchise to the funding franchises specified by Fannie Mae. Items such as repair costs are not discounted.

Here are some closing costs a seller can cover:

fee Estimated costs
Origination fee Usually 1% of the loan amount
Mortgage points Each point corresponds to 1% of the loan amount
Registration fee $ 350 on average
Credit Report Fee $ 30 to $ 50
Title Insurance Fee Average of $ 1,000, but costs vary by state and house price
Homeowner insurance Varies depending on location and coverage
Appraisal fee $ 300 to $ 500, but can cost more depending on the size and location of the home
Home inspection fee $ 280 to $ 400, but can cost more depending on the size and location of the home

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Seller Concession Limitations

To ensure buyers do not borrow more than they can afford, investors who repay mortgage loans set seller concession limits as part of their underwriting standards. These limits vary depending on Credit type.

Conventional loan

Traditional loans are not funded by the federal government, but by Fannie Mae or Freddie Mac.

Here are the concession limits, according to Fannie Mae:

  • The concession limits for conventional loans range from 3% to 9% of the purchase price for primary and secondary loans Second homes, depending on the loan-to-value ratio.
  • for Investment property, the concession limit is 2%.
Example: If you have a vacation home worth $ 250,000 for your own use with a conventional mortgage and a 20% down payment, your lender would allow you to accept up to 6% (or $ 15,000) in seller concessions.

FHA loans

A FHA loans is insured with the Federal Housing Office. They are a popular option among First time home buyers because they have looser credit requirements than traditional credit.

FHA seller concessions work in a similar way to traditional loans. The concessions are limited to 6% of the sales price or the appraised value, whichever is lower.

Example: If you were using an FHA loan to buy a home for $ 250,000 but the home was valued for only $ 245,000, your lender would allow you to accept up to $ 14,700 (6% of $ 245,000) in seller concessions.

VA loan

VA loan are guaranteed by the US Department of Veterans Affairs and offer competitive rates to eligible service members, veterans, and spouses. No down payment is required on a VA loan.

Some key seller concession guidelines to consider for VA loans include:

  • The concession limit for VA loans is 4%.
  • Sellers must pay real estate commission, brokerage fees, and a termite report fee required for VA purchase loans
  • You can negotiate with the seller to determine who will pay the other closing costs, including the VA funding fee and the commitment fee.

Example: If you were eligible for a $ 250,000 VA loan, your seller concessions would be capped at 4% (or $ 10,000).

Advantages and disadvantages of seller concessions

Concessions from sellers can be very beneficial to some homebuyers, but their disadvantages can work against you if you’re not careful.

advantages

  • You can help to conserve your cash reserves.
  • They could allow a larger deposit.
  • They can help you buy a home that you might not otherwise be able to afford.

disadvantage

  • You pay interest on closing costs for the life of your loan.
  • You can put conventional financing at risk if the resulting purchase price exceeds the property’s appraised value.
  • You can limit your bargaining power on other aspects of your sale, such as repairs.
  • You are increasing your LTV so that you start with less equity in your home than you have.

How to negotiate seller concessions

Although it is possible Negotiating concessions In any market, the right circumstances increase your chances of success. Here are some effective strategies you can use while negotiating:

1. Determine the market situation

Sellers are more likely to agree to concessions in a buyer’s market where there are too many apartments available in relation to the number of buyers who want to buy. In this case, concessions can help the seller sell their home faster.

In a seller’s market where more buyers are competing for too few homes, you need to make a stronger offer – ex. B. Waiver Credit risks – to balance the application for a license.

2. Decide what concessions you will ask for

Concessions are not an all-or-nothing thing. You are more likely to get concessions asking for the concessions you want, rather than all the concessions you want.

3. Give something back

When asking for concessions from a seller, you are essentially asking them to subsidize your home purchase. You may have to offer something in return, e.g. B. a full price offer (or higher) or the waiver of repairs, as long as the condition does not jeopardize your financing.

4. Consider working with a real estate agent

Working with a Real estate agent Anyone who knows your market and the trends that are influencing it can help you negotiate your offer. And once you’ve signed a contract, your agent will work in your best interests to fix any malfunctions and keep the transaction on track.

Continue reading: No Closing Cost Mortgage: Is It Really Worth It?

About the author

Daria Uhlig

Daria Uhlig contributes to Credible, which covers mortgages and real estate. Her work has appeared in publications such as The Motley Fool, USA Today, MSN Money, CNBC, and Yahoo! Finances.

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