What are Seller Concessions?

Part 3 of Lending Language / Mortgage Meaning series

“Seller concessions,” or “seller-paid closing costs,” in the home mortgage industry refer to credits that the seller gives to the buyer as part of the purchase agreement. ?Lenders don’t typically allow closing costs to be arbitrarily rolled into the loan amount, but seller concessions allow a credits to be built into the purchase price. This means the buyer doesn’t need to pay all closing costs out-of-pocket at closing. If the concessions are set right, the buyer may not pay any closing costs at closing!

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Here’s a hypothetical example that compares the difference in out-of-pocket money due from a buyer:

• Assume an FHA purchase with a minimum down payment of 3.5%
• Assume 10k in closing costs (and escrow expenses)
• Assume the minimum the seller is willing to accept for the home is 200k

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• Option 1: If the sales price is set at 200k, the buyer would need 7k down plus 10k for the closing costs.? This means the buyer would need about $17,000 at closing.
• Option 2: if the sales price is set at 210k, with 10k in seller concessions, the closing costs would be covered by the sellers at closing (with a credit from the purchase price).? The seller still makes the same amount from the sale (200k), but there’s an extra 10k included in the sales price; it’s credited to the buyer at closing.? This allows the FHA loan amount to be set higher, based on the 210k price. In this case, the borrower only needs $7350 at closing (a 3.5% down payment on the adjusted sales price).

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NOTES: Each loan program has a different limit for how much the sellers are allowed to pay. It’s important to be aware of the specific limit that applies to your loan option. Also, the seller credits can’t cover any portion of the down payment and the buyer can’t get "cash back" at closing from the credits.

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The best Loan Officers make sure to inform their clients of these options with seller credits and estimate the closing costs they can ask for. ?This helps buyers negotiate for the optimal amount of seller concessions. This is one of the most important parts of making sure a buyer can be comfortable with the amount of money they need to bring to closing.

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Contact me with questions about seller concessions / seller-paid closing costs so we can be sure to help you take advantage of this option.