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In a home purchase, seller concessions are closing costs that a seller agrees to pay on behalf of the buyer, usually as a way to make the purchase more attractive to the buyer.
Seller concessions can cover a wide range of costs on a mortgage loan, but the exact terms can vary depending on negotiations between the two parties. Here's what to know about how seller concessions work and their potential limits.
How Do Seller Concessions Work?
The homebuying process typically involves some negotiation between the buyer and the seller. In the event of a buyer's market—when the supply of available homes outpaces the demand from prospective buyers—sellers often make concessions to make their home more attractive.
These concessions come in the form of the seller agreeing to cover some of the buyer's closing costs. When a buyer makes an offer on a home, they may include seller concessions in their proposal. The seller can then agree to the concessions, reject them or make a counteroffer.
The seller benefits from making concessions because it can help them sell the home more quickly, and they can deduct them from their proceeds for tax purposes. On the other hand, the buyer benefits because it helps them save money. In particular, first-time homebuyers who may underestimate the upfront costs of buying a home can make the most of seller concessions.
If the seller agrees to concessions, the costs come out of their proceeds on the sale of the home—they don't have to pay them out of pocket.
What Costs Can Seller Concessions Cover?
There are several costs a seller can cover for a buyer. With some closing costs, such as the temporary buydown of the buyer's mortgage rate, the only way for the buyer to get the benefit is if the seller pays for it.
Here are some of the fees and charges a seller can cover with concessions:
- Property taxes
- Attorney fees
- Appraisal
- Origination or processing fee
- Title insurance
- Discount points
- Credit report fees
- Recording fee
- Inspection fee
- Insurance
- HOA fees
Limits on Seller Concessions
While sellers can cover a lot of upfront costs for buyers, seller concessions can't cover all of the expenses buyers are expected to pay. What's more, there are limits to seller concessions based on the type of loan program the buyer is using to finance the purchase.
These limits are based on a percentage of the lesser of the home's appraised value or sales price and can vary depending on the buyer's down payment amount.
| Loan Program | Buyer Down Payment | Maximum Concession Amount |
|---|---|---|
| Conventional loan | Less than 10% | 3% |
| 10% - 25% | 6% | |
| More than 25% | 9% | |
| FHA loan | Any | 6% |
| USDA loan | Any | 6% |
| VA loan | Any | 4% |
Here are a couple of more notes beyond the basics for each program:
- Investment properties: Regardless of your down payment amount, the maximum seller concession amount is 2%.
- VA loans: Seller concessions may include payments toward the buyer's debts and judgments, the VA funding fee and gifts, such as a home appliance.
Pros and Cons of Seller Concessions
Seller concessions can occur in any market, but they're most often used in buyer's markets. Whether you're a buyer or a seller, here are some potential advantages and disadvantages to consider.
Pros of Seller Concessions
- Can help sell the home faster: In a buyer's market, buyers have more leverage. Seller concessions can make a home more appealing and help the seller get the home off the market faster.
- Can help the buyer save money: Paying for a down payment and closing costs can be challenging for some buyers. Seller concessions can make the homebuying process more affordable and remove some of the burden of closing costs. It can also give the buyer more leeway to make a higher offer.
- Reduces the tax burden for the seller: Seller concessions are considered a sales expense and are taken from the seller's proceeds. If your profit exceeds the exclusion limit set by the IRS—$250,000 for single sellers and $500,000 for married sellers who file a joint return—then seller concessions can reduce your potential tax liability.
Cons of Seller Concessions
- Can make an offer less appealing in a seller's market: If a buyer requests seller concessions in a market where sellers have more leverage, it could make the buyer's offer less attractive.
- Could cost the buyer more in the long run: If a buyer makes a higher offer in exchange for concessions—say, by increasing their proposal by $5,000 to get $5,000 in concessions—they could end up paying more in the long run because they're paying interest on the extra amount.
- Eats into the seller's profit: If you're a seller who's planning to use your sales proceeds for a down payment on your next home, paying concessions can impact your ability to make the down payment you want.
Build Credit to Maximize Savings
If you're planning to buy a home—or you're selling yours so you can buy another one—seller concessions can impact you in different ways. However, the best way to capture savings during the homebuying process is to improve your credit so you can qualify for a low interest rate on your mortgage loan.
To prepare your credit for the mortgage process, start by reviewing your credit score and credit report to evaluate your position. Then, use your credit report to determine which areas of your profile you can address. You can also look for other ways to improve your credit as you get the rest of your financial life in order.
This process can take time, but even a slightly lower interest rate can potentially save you tens of thousands of dollars over the life of your loan.