Buying a home is an exciting milestone, but finding a way to make the monthly payment and upfront costs manageable can be challenging.
One option buyers may not realize they have is seller concessions. When negotiated as part of a real estate transaction, seller concessions can help cover eligible closing costs and may even help buyers buy down their mortgage interest rate.
For buyers and real estate professionals alike, understanding how seller concessions work can open the door to more creative ways to make homeownership affordable.
What Are Seller Concessions?
Seller concessions are contributions a home seller agrees to make toward certain costs associated with the buyer's purchase.
Instead of the buyer paying every eligible expense themselves, the seller agrees to contribute an amount toward those costs as part of the purchase agreement.
These contributions may be used toward eligible closing costs, prepaid expenses, and discount points, depending on the loan program and transaction guidelines.
Seller concessions are negotiated as part of the offer, so it's important to discuss the possibility early in the homebuying process. The buyer, real estate agent, and loan officer can work together to determine whether they make sense for the transaction.
How Can Seller Concessions Make Homeownership More Affordable?
When buyers think about negotiating a home purchase, one of the first things that may come to mind is asking the seller to lower the purchase price.
While a lower purchase price can be helpful, it isn't the only way to approach affordability.
Seller concessions offer another option that may provide benefits both at closing and over the life of the mortgage.
Here are two important ways they can help.
1. Reduce Out-of-Pocket Costs at Closing
One of the biggest challenges for some homebuyers is having enough money available to cover the expenses associated with closing. Even after finding a home that fits their budget, buyers may be surprised by the additional costs involved in completing the purchase.
When a seller agrees to contribute toward eligible closing costs and prepaid expenses, it can reduce the amount of money the buyer needs to bring to closing. That can give buyers more flexibility as they prepare for their new home and manage the expenses that come with moving.
The Consumer Financial Protection Bureau offers a helpful overview of the costs buyers may encounter when getting a mortgage. You can learn more in its guide to understanding loan costs.
2. Buy Down the Interest Rate and Lower the Monthly Payment
This is where seller concessions can make a particularly meaningful difference.
In certain situations, seller concessions can be used to purchase discount points. Discount points are upfront costs paid to help reduce the interest rate on a mortgage. By negotiating seller concessions that can be applied toward these costs, buyers may be able to secure a lower interest rate and create a more affordable monthly payment.
For buyers who are concerned about the ongoing cost of homeownership, this can be an important option to explore. The important thing is to compare the options. Buyers should understand how much the buydown costs, how it affects the monthly payment, and how long it may take for the potential savings to make the upfront expense worthwhile.
Seller Concessions vs. a Lower Purchase Price
So, should a buyer always ask for a lower purchase price? Not necessarily.
A price reduction and seller concessions serve different purposes. A lower purchase price reduces the amount the buyer is paying for the property. Seller concessions, on the other hand, can help cover eligible expenses or be applied toward discount points to buy down the interest rate.
Depending on the buyer's needs, one approach may provide a greater benefit than the other.
For example, imagine a buyer who finds a home they love but is concerned about the monthly mortgage payment. A lower purchase price may help reduce the amount financed. However, using seller concessions toward discount points may offer another way to reduce the monthly payment.
If the buyer is more concerned about the money needed at closing, seller concessions could potentially help with eligible closing costs and prepaid expenses instead. The best approach depends on the buyer's individual situation.
The goal isn't simply to negotiate the largest concession possible. It's to structure the offer in a way that makes the most sense for the buyer while remaining workable for the seller.
Are There Limits on Seller Concessions?
Seller concessions can be helpful, but they aren't unlimited. The amount a seller can contribute and the expenses those contributions can cover depend on the type of mortgage, occupancy, and other loan guidelines.
There may also be restrictions on how the funds can be applied. Seller contributions generally cannot be used for a buyer's down payment, and they must be applied to eligible costs under the applicable loan program.
For example, Fannie Mae's guidance on interested party contributions explains how seller contributions are handled for eligible conventional mortgage transactions.
This is why it's important to have a loan officer review the details before including concessions in an offer. Understanding the guidelines ahead of time can help prevent surprises during the transaction.
Why Buyers and Realtors Should Work Together
One of the most valuable things a real estate agent can do is help buyers understand the options available when negotiating an offer. Sometimes, buyers may assume their only choices are to pay the asking price or request a price reduction. Introducing seller concessions can create another opportunity to explore.
But the conversation shouldn't happen without the mortgage professional. Before submitting an offer, the buyer's agent and loan officer can work together to review the buyer's needs, estimated closing expenses, and available financing options.
This helps everyone understand what may be possible before the terms are written into the contract. It also helps prevent surprises later in the transaction. Seller concessions must be properly documented, and the amount that can be used is subject to program guidelines and the buyer's eligible expenses.
Make Your Next Home Purchase More Affordable
Every home purchase is different, and there isn't one strategy that works for every buyer.
But seller concessions are an option worth exploring when affordability is a concern. They may help reduce upfront expenses, support a more manageable financing structure, and give buyers another way to approach negotiations.
The key is looking beyond the purchase price and considering the entire transaction.
If you're thinking about buying a home, or you're a real estate professional helping clients navigate today's market, let's talk about the possibilities.
My name is Mitch Severance, and I’m here to help you understand your options, review the numbers, and explore ways to make homeownership more attainable.
Let's find a strategy that works for you.