To Concede or Not to Concede: Weighing the Pros and Cons of Seller Concessions

Seller Concessions Pros and Cons

Seller concessions can make a home purchase more affordable for buyers, but can also impact the seller’s profit and appraised value.

Let’s explore the pros and cons of seller concessions, negotiating for benefits, limits by loan type, and choosing between concessions and a lower sales price.

As a potential homebuyer, you may have heard of seller concessions and wondered what they are and how they can benefit you.

Seller concessions refer to instances where the seller agrees to pay costs associated with a home sale transaction. These costs can include the buyer’s closing costs, home improvements, inspection fees, and property repairs.

Closing Costs and Seller Concessions:

Seller concessions to pay buyer’s closing costs for a home purchase that involves a conventional loan, a conforming loan, an FHA loan or a VA loan can be applied to buyer closing costs. Here’s a list of most closing costs incurred by the home buyer that can be paid by seller concessions on a real estate transaction involving a mortgage:

• Loan Origination Fees
• Mortgage Discount Points
• FHA upfront Mortgage Insurance
• Title Company Fees
• Attorney closing and escrow fees
• Prepaid Insurance
• Prepaid Property Taxes
• Title Insurance Premiums
• Title Insurance Endorsements
• Property Survey
• Delivery Fees
• Recording Fees.
• Appraisal fee

The important takeaway to remember: Seller concessions aren’t allowed to assist the Buyer with the down payment amount. Seller concessions are when the seller pays closing costs and sales expenses incurred by the buyer. Seller concessions can help the seller attract more buyers whether it’s a seller’s market or a buyer’s market.

• In a seller’s market, offering a seller’s concession could generate multiple bids.
• In a buyer’s market, offering a seller’s concession could attract buyers along with an experienced real estate agent to help with the home’s sales price.

Seller concessions that exceed all the closing costs are forfeited by the home buyer if not utilized. When exceeding seller concession limits, consider discounting the mortgage interest rate using mortgage discount points.

It’s essential to know that a seller’s concession involving property repairs or home defects can jeopardize the mortgage loan for the home buyer or cause delays. The buyer’s loan approval for conforming and government loans will most likely require repairs mentioned on the purchase agreement to be completed before final loan approval. There are exceptions to this, so make sure to discuss this with your mortgage professional and your real estate agent when you negotiate seller concessions during the home buying process.

Seller Concessions Show on the Closing Disclosure.

The closing disclosure will show seller concessions as a “seller credit” or a “closing cost credit” from the seller. The buyer then will pay closing costs with the seller concession.

Pros and Cons of Seller Concessions

 

Like any other transaction, seller concessions have their advantages and disadvantages. Here are some of the pros and cons to consider:

Pros:

1. Buyers can reduce their out-of-pocket expenses, making the home more affordable when seller concessions cover closing costs.
2. Sellers can make their property more attractive to potential buyers, potentially leading to a quicker sale in both a buyer’s market and a seller’s market.

Cons:

1. Sellers may receive less profit from the sale due to the seller’s concessions.
2. The property’s appraisal value might be affected if the sales price is artificially inflated to cover concessions.

Negotiating for Seller Concessions

Homebuyers should understand the local market conditions when negotiating, ask for seller concessions, and present a strong offer. Buyers can then ask for specific seller concessions, such as requesting the seller to pay for closing costs or make necessary repairs to the property.

Maintaining open communication and being willing to compromise is crucial, as this can result in a win-win situation for both parties.

Limits on Seller Concessions by Loan Type

Different loan types have seller concession limits of seller concessions allowed:

• Conventional loans: Seller concessions limits of 3% of the purchase price for loans with down payments of less than 10% and 6% for down payments of 10% – 25%. Above 25%, seller concessions can total 9%.
• FHA loans: Seller concessions for closing costs are limited to 6% of the purchase price.
• VA loans: VA has a max of seller concessions at 4%; however, in reality, it’s larger because, with VA loans, some closing costs aren’t covered by the 4% maximum seller concessions amount.

Choosing Between Seller Concessions and a Lower Sales Price

Deciding between a lower sales price or concessions depends on the Buyer’s specific needs and financial situation. A lower sales price will reduce the overall mortgage amount and likely result in lower monthly payments and down payments. However, seller concessions can help offset upfront costs like closing fees, making it easier for the Buyer to afford the purchase. Buyers should weigh the long-term benefits of a lower sales price against the immediate financial relief concessions to determine the best option.

When choosing between a lower sales price and seller concessions, buyers should also consider factors such as the local housing market and the property’s condition. If the market is competitive, negotiating a lower sales price may be difficult. Negotiating seller concessions could be a way to reduce costs. Use this Mortgage Calculator to help you choose.

Seller Concessions that Involve Home Repairs

In cases where the real estate requires significant repairs or improvements, asking for seller concessions can be valuable in ensuring that necessary work is completed without adding extra financial burden on the Buyer.

After completing all repairs mentioned in the purchase and sales agreement, the appraiser must update the real estate appraisal. Then, the mortgage lender will review and verify that the repairs mentioned in the purchase agreement are complete by requiring an updated appraisal report before clearing the loan to close and fund. Depending on the repairs required, the mortgage lender could also require an inspection report by a licensed inspector.

Another aspect to consider is the potential impact on the appraised value of the real estate. If the sale’s price of the real estate is inflated to cover concessions, the real estate appraisal may come in lower than the agreed-upon home sale’s price, affecting home loan financing options and, ultimately, the real estate transaction’s success.

Buyers and sellers must communicate openly and work together to find a balance that meets the needs of both the buyer and the seller.

Seller concessions can be valuable for buyers and sellers in a home sale transaction. While they can help reduce upfront costs and make the home more affordable for the Buyer, they may impact the seller’s net proceeds and affect the property’s appraisal value.

When deciding between a lower sales price and a concession, buyers should consider their financial situation, plans, the property’s condition, and the local housing market. Working with an experienced mortgage lender can provide valuable guidance and help buyers make the best decision for their unique circumstances.

Seller Concessions – 7 Key Takeaways:

     1) Seller concessions can help reduce upfront costs for homebuyers, making a home’s sale price more attractive to buyers.

     2) Various loan types have specific limits on seller concessions, and they cannot be applied to down payments.

     3) Property repairs and home defects addressed through seller concessions can affect mortgage loan approval or cause delays, requiring open communication and collaboration with mortgage professionals and real estate agents.

     4) Homebuyers should consider their financial situation, plans, property condition, and local housing market when deciding between a lower sales price and seller concessions.

     5) Open communication and a willingness to compromise are crucial for reaching mutually beneficial agreements between buyers and sellers.

     6) The impact of seller concessions on the property’s appraisal value and the seller’s profit should be carefully considered.

     7) Homebuyers should work closely with mortgage professionals and real estate agents to make informed decisions based on their unique circumstances, ensuring a successful and enjoyable home purchase experience

Contact Steve Silver at Silver Mortgage, 1-800-920-5720, for more information about seller concessions and how they can impact the mortgage you select in Texas or Florida.

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