Given current market conditions, one of the last things home sellers have to wrestle with is whether to pay concessions as a way to keep a potential buyer on the hook. Some sellers have to resort to this tactic if they are having trouble selling their home or have a serious buyer who cannot afford some of the closing costs.
But even though your sellers may not need this trick up their sleeve right now, it never hurts to educate them in case it’s a move they need to make in the future. An excellent place to start is identifying what seller’s concessions are and when or if necessary.
Seller concessions basics
Seller concessions are closing costs the seller agrees to pay. Examples include property taxes, attorney fees, appraisal costs, mortgage discount points, and title insurance fees. If the seller pays these fees, the home may be more affordable for the buyer.
Concessions are a fixed dollar amount that the seller can put toward the buyer’s closing costs and prepaids. As with anything, there are rules to follow:
- The seller is permitted to contribute a specific percentage of the purchase price to the closing costs.
- Concessions can ONLY be put toward hard and soft costs
- Concessions CANNOT be used to cover the down payment because that would be an inducement to sell. However, that doesn’t mean that your client can’t receive gifts from relatives or close friends to put toward their down payment.
When it comes to the home-buying process, we coach clients to expect four out-of-pocket “money milestones”:
- Earnest money: This is offered in good faith to show that the buyer is serious.
- Home inspection: This isn’t necessary but encouraged.
- Appraisal fees: Fees that allow the property to get appraised for value.
- Funds to close: This will invariably impact a buyer’s ability to close on a house, which is why they might ask the seller to pay certain costs on their behalf.
Sellers can provide credits for the buyer. And sometimes, it certainly helps the buyer out of a jam if they are short on funds to close the transaction.
Having the seller cover those costs would allow buyers who do have enough money to put more on the down payment, thus lowering, or potentially eliminating, the need for private mortgage insurance (PMI).
If a buyer cannot fund a 20 percent down payment using a conventional mortgage loan, they will have a monthly premium (PMI) as part of their total housing payment. That premium decreases with every 5 percent increment paid on the down payment and goes away entirely if the buyer has a 20 percent down payment.
Seller concession limits
The maximum amount of seller concessions (aka – seller credits) differs by loan type:
- FHA: 6%
- USDA: 6%
- Conventional: 3% to 6%
- Veterans Affairs (VA): 4%
It’s important to note that these caps may not allow the seller to pay for all the buyer’s costs. The buyer should be prepared to cover the remaining funds to close as necessary.
Just because your current sellers don’t need to entice buyers by offering to pay for closing costs doesn’t mean they won’t ever need you. Sharing this information can help them be prepared if or when the situation arises.