What are Seller Concessions and How Do They Work?

Estimated reading time: 7 minutes

Real Estate Agent. But what exactly are seller concessions, and what can they include?

What are Seller Concessions?

As a simple definition, seller concessions refer to anything that the seller concedes on or “gives in” to the buyer during a real estate transaction. Effectively, seller concessions are seller-paid credits applied toward certain buyer closing costs and prepaid expenses, subject to loan program and lender guidelines.

What Do Seller Concessions Cover?

Concessions can cover a variety of one-time costs, including certain closing or prepaid costs. As you move through the mortgage process, your lender will provide you with a loan estimate. This document includes what your projected closing costs, monthly payments, and interest rate may be.

What are Some Examples of Seller Concessions?

Seller concessions can be used to cover certain buyer costs at closing, depending on loan program guidelines and lender requirements. Common examples include:

Appraisal or Inspection Fees

A home appraisal is used to determine whether the property’s listing price is suitable based on its condition, location, and features when compared to recent sales of similar properties. While an appraisal can often be mistaken for an inspection, they are two different processes.

An inspection is a visual assessment of a property’s safety and quality. Inspectors will look at a home’s physical structure, HVAC and electrical systems, plumbing, and exterior elements. While every inspector is different, you may expect them to also look at the home’s roof, ceilings, walls, floors, windows, doors, and the basement. Typically, inspection fees are paid directly by the buyer. But in some cases, they may be eligible to be covered in seller concessions.

Title Insurance and/or Recording Expenses and Government Fees

Title insurance covers certain legal costs that could arise in a title dispute or other disruptions, such as fraud, filing errors, back taxes, or conflicting wills. Seller concessions may also be used to cover recording fees and other government-related charges that are associated with the transfer of ownership.

Attorney and Loan Origination Fees

A loan origination fee is an upfront charge as compensation for executing the loan, such as processing, underwriting, and funding.

Attorney fees are similar, as they cover legal services related to preparing and reviewing documents and completing the title transfer.

Prepaid Homeowners Insurance

Homeowners insurance usually covers four types of incidents: interior damage to the home, exterior damage to the home, loss or damage of belongings, and liability for any injury that arises on the property.  

Prepaid Mortgage Insurance

Mortgage insurance lowers the risk a lender takes on for issuing a loan in case you stop paying your mortgage, also known as a mortgage default. Its requirements depend on the loan program.

Conventional loan programs may require private mortgage insurance (PMI) if the borrower’s down payment is less than 20%. PMI is generally canceled once the homeowner reaches a certain amount of equity. FHA loans require a mortgage insurance premium (MIP), which typically remains active for the life of the loan. However, borrowers who make a down payment of 10% or more may request MIP removal after 11 years.

To know more about mortgage insurance and whether it’s required for your loan, please contact your Licensed Loan Originator.

Property Taxes

Property taxes fund various local needs, such as emergency medical services, water and sewer infrastructure, public education, road construction, and other civil services. Seller concessions may be used to cover prepaid property taxes that are due at closing.

Are Seller Concessions the Same as Price Reductions?

No, seller concessions are not home price reductions. Price reductions occur when a seller lowers the listing or sale price of their residence for the buyer. Seller concessions cannot exceed loan program limits and must be supported by the appraised value of the property.

What are the Differences Between Seller Concessions and Price Reductions?

With seller concessions, prepaid costs are rolled into the home’s purchase price, pushing it slightly higher than originally listed. When the sale is concluded, the buyer pays down the concessions over the lifetime of the loan through their monthly mortgage payments.

As an example, let’s pretend you’re selling a home for $100,000. The first-time homebuyer that put in an offer would have approximately $10,000 to cover the down payment, closing costs, and other prepaids for the home. To ease their out-of-pocket expenses, you offer $6,000 for concessions. The purchase price of the home is then bumped up to $106,000 and the buyer now only requires $4,000 for closing. In this illustrated scenario, the property must appraise for the increased offering price. This example is for illustrative purposes only; actual concession limits, appraisal outcomes, and loan terms vary by loan program and lender guidelines.

Do Seller Concessions Only Benefit the Homebuyer?

Seller concessions can offer benefits for both homebuyers and home sellers.

For buyers, concessions may help reduce upfront costs at closing, which can make purchasing a home more manageable and leave more cash available after the loan closes.

This can be especially helpful for first-time homebuyers who may have limited savings after accounting for a down payment and other purchase-related expenses. By lowering out-of-pocket costs at closing, concessions can help buyers maintain their personal savings and feel more financially comfortable after taking on a major financial commitment like homeownership.

Sellers can also benefit from offering concessions. By helping reduce a buyer’s cash-to-close requirements, concessions may expand the pool of qualified buyers, particularly those using loan programs with minimum contribution requirements that vary by loan type.

Additionally, seller concessions can be a useful negotiation tool when a seller wants to encourage a faster closing or generate more interest in a property that has been on the market longer than expected. For example, a seller who is coordinating the sale of one home with the purchase of another may use concessions to help keep their transaction timeline on track.

How Should I Negotiate Seller Concessions?

The best way to know how to negotiate for seller concessions is to ask your Real Estate Agent. As an expert negotiator, your agent will help you prioritize your concession requests and your offer.

Seller concession limits depend on the buyer’s mortgage type and the size of the down payment. To learn more about seller concessions, your affordability, and home financing options, reach out to us today!