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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Seller Concession
Seller concession is one of the most significant parts of a real estate transaction.
If you are a buyer or a buyer’s agent, these are the fundamental skills you should have. In this post, we will learn what is a seller concession and how does it work.
What is a seller concession?
Seller concession is sometimes also known as seller credits or seller contributions. Seller concession is essentially where the seller is going to pay a portion of your closing costs.
Now, let us note that we are talking about a portion of your closing costs and not all of the closing costs. The seller will pay a percentage of the purchase price to go towards the costs that are required for you to close on a property.
Some of these costs are appraisals, title fees, taxes, insurance, recording fees, and more.
Everything associated with you closing on a property and acquiring a loan is going to be the closing cost so the seller will be able to give you a credit if you can negotiate it well towards those closing costs.
Something to keep in mind here is that closing costs will never be able to go towards your down payment. Your down payment is going to be the minimum required investment for a property.
For example, let’s say you are putting 3% down on a property. Maybe the seller is giving you 3% in closing cost, they don’t equal out.
Because what is happening is we have 3% of our down payment, we also have the closing cost added on top of that and then any seller concessions which we get are going to drop it down.
This number will never be able to cut into the down payment required. So the seller concessions only go to pay down a portion of the closing costs.
Seller concessions are limited by loan types. Not all loans have the same amount of seller concessions.
For example, investment loans most of the time have a maximum of 2% of the purchase price to be used as closing costs.
Seller Concession for Conventional Loans
The seller concessions for conventional loans, most of the time we can see is 3% of the purchase price towards the closing costs.
Depending on how much you put down, the seller concession for conventional loans may go up to 6-9 percent of the closing cost that you can receive from the seller.
Seller Concession for FHA Loans
The seller concessions for FHA and USDA loans can go up to 6% of the purchase price to go
towards your closing costs. FHA says the seller can pay up to 6% of the purchase price for closing costs and the prepaid cost on your behalf.
So on a $200,000 property, you can have a seller concession for an FHA loan up to $12,000 to cover those costs.
Speak to your reals estate agent to know more about how you can save your out-of-pocket expense by negotiating towards the seller concession.
Seller Concession for VA Loans
The seller concessions for VA loans can go a maximum of up to 4% of the purchase price towards your closing costs.
According to VA guidelines, the 4% rule applies to the item such as prepayment of property taxes and insurance, appliances, and other gifts, etc from the builder or seller.
Affect of Seller Concessions
Getting your closing costs paid for is great but the problem is it affects your negotiation position a little bit. If you put yourself into the sellers’ shoes, they want to get the most amount of money for their property as possible.
They are already paying for the realtor, tax proration to you, and if you add seller’s concession on top of that, it is more money which they have to take out of their portion of the equity to close on the property.
If you come into an offer with a 6% seller concession and another bid comes in for 3%, most likely, the seller is going to go with the 3% seller concession offer because he is going to save 3% by going with that deal instead of paying an entire 6% towards your closing costs.
Seller Concession Structure
One way to do this is, let us say you were to buy a property that is listed at $97,000 and get a mortgage for the entire amount and have down payment and closing costs paid in full.
Or you can structure a deal for a hundred thousand dollars and then have a 3% seller concession baked into the purchase price of the property.
So instead of paying $97,00 for the property and 100 percent of the total closing costs, you would purchase the property for a hundred thousand dollars and receive 3% to pay down your closing cost.
It really depends on how you negotiate the contract and what your realtor feels is best for you to be able to win that deal.
Paying Discount Points Using Seller Concessions
You can take the seller credits to go towards the prepaid interest that will buy down your rate. Essentially, all rates are given at par.
You are given a rate based on your risk factor as a buyer and if you have a higher risk level you are going to get a higher interest rate and a lower risk level will attract lower interest rates.
A lender can pre-pay some of your interest so that you can drop down your rate in advance. If you are planning to stay in the property for a long time, a lower rate will bring more savings over the life of the loan.
So seller concessions can help you buy down some prepaid interest if you want to so that you can get a lower rate.
Conclusion
These are some of the ways to utilize seller concessions. Most of the time a seller concession is used to cover a portion of your closing cost if not all.
It will help to bring your closing cost considerably lower.
