As more buyers are entering the home buying market, just as many home sellers are trying to take advantage of the movement.
You’ve heard it stated, “If you don’t ask for something, odds are you won’t get it.”
A good percentage of home buyers do not ask for seller concessions. On the other hand, a good percentage of home sellers do not offer it as part of marketing their property. For both parties, the reason this critical strategy is not used is simply because they do not know about it; or they do not understand how it works.
To be fair, millions of transactions have used this strategy as part of their negotiations and even though, not perfect, oftentimes it was the sole reason why the transaction was completed.
Seller Concession Defined
A Seller Concession is simple. It merely is defined as the incentive a seller is allowed to provide the buyer. Further, it is specifically used when the buyer is using a mortgage to finance the purchase. Investors of mortgages set rules and guidelines on how the “concessions” must be used. Typically, they are to help pay buyers closing cost or other incidentals as part of purchasing the property.
While the concept is the same for all mortgages, investors of conventional mortgages (commonly known as Fannie Mae and Freddie Mac) and government mortgages (FHA insures mortgages and VA guarantees mortgages) have limits on how much the seller can provide. This is done to insure the buyer has minimal investment (also known as skin in the game) towards the purchase.
“Something is better than nothing”
The amount is supposed to be a directly tied to home valuation based on the lenders appraisal. Even though sellers want to sell their property, no one enjoys just handing over money. For those stubborn sellers, some buyers or their realtors get sellers to agree to this strategy by increasing the sales price to make up the difference. This allows sellers to achieve their “net” goal, or money they were expecting had a seller concession not be utilized. However, this component only works if the property can appraise at the increased sales price.
As mentioned there are limits on how much concession a seller may provide. The less the down payment is; the less concession. The more down payment is; the more concession. Check with your lender for exact amounts based on your transaction.
*For illustration purposes a sales price of $225,000 will be used
Fannie Mae & Freddie Mac
With as little as 5% down payment, a seller may provide up to 3% seller concession. The amount of concession cannot exceed *$6,750. For those who can put 10% down, the concession increases up to 6% or *$13,500.
FHA mortgages are insured, which means the lender has some protection in the event of foreclosure. The insurance is the motivation which allows a loan to be made with as little as 3.5% down payment. The concession amount is up to 6% or *$13,500
VA mortgages are guaranteed, which means the Veterans Administration guarantees the lender will be made whole in the event of foreclosure. Due to the down payment requirement of ZERO, seller concessions are not needed. However, they sometimes are used to help with property improvements. Either way, concessions can be used up to 4% or *$9,000.
Why is it Necessary?
Seller concessions are the motivation for a transaction to take place. They are not new and have been used in some form as long as mortgages have become the most popular tool to finance home purchases.
However, they are useless unless the seller requests them or the buyer offers them. The trade-offs are simple and even for those who think they are not worth using, the facts are simple; buyers are looking for the best deal and sellers are trying to make their home more attractive than the one next door!
Interest rates are already at all-time lows, so as the home buying competition picks up, this is one solid tip which has more advantages, than disadvantages.