If you’re exploring the homebuying process, you’ve probably heard the term “seller concessions.” But what does it mean, and how can it benefit you as a buyer? Here’s a simple explanation to help you make the most of this opportunity.
What exactly are seller concessions?
In simple terms, seller concessions are incentives offered by the seller to make the deal sweeter for the buyer. These can take various forms, from covering closing costs to providing credits for repairs. Essentially, they’re a way for sellers to entice buyers into making a purchase, especially in a competitive buyer’s market.
Why do sellers offer concessions?
You might be wondering, “Why would a seller give me money?” Well, in a buyer’s market the seller may try to incentivize the deal, so that you choose to buy their house instead of someone else’s.
What types of concessions are common?
| Type of Concession | Description |
| Closing cost assistance | Sellers might agree to pay a portion of your closing costs, which can save you thousands upfront. |
| Repair credits | If the home has issues that need fixing, sellers can provide a credit that you can use for repairs after closing. |
| Home warranty | Offering a home warranty can give buyers peace of mind, knowing that any major issues in the first year are covered. |
| Price reduction | Sometimes, instead of direct concessions, sellers may choose to lower the sale price of the home to make it more appealing. |
How do seller concessions affect your mortgage?
Heads up! Seller concessions can impact your mortgage and loan terms in several ways.
- Lender limits: Different loan types come with varying rules regarding seller concessions. For instance, conventional loans may allow concessions up to 3% for down payments of less than 10%, and as much as 6% for down payments of 10% or more. FHA loans, on the other hand, generally allow up to 6% VA loans can be very generous as well, letting sellers contribute up to 4%. Lenders impose these limits to ensure that the concessions don’t mask the true cost of the home, making it seem more affordable than it really is.
- Affordability checks: Lenders want to make sure you can actually afford your mortgage payments. If sellers are throwing in a bunch of concessions, it can artificially inflate the purchase price while reducing your upfront costs. This might lead you to overestimate what you can comfortably afford, putting you at risk of defaulting on the loan later. Lenders limit concessions to keep things realistic and help ensure you’re not biting off more than you can chew financially.
- Total loan amount: Lenders will look at the total amount of seller concessions and how they fit into the overall loan. If concessions exceed what the lender allows, you might need to come up with additional cash out of pocket. This can be a bummer if you were counting on those concessions to reduce your upfront costs.
- Impact on appraisal: If the seller concessions are substantial, they could influence the home’s appraisal value. Lenders will want to ensure the property’s value aligns with the purchase price. If the appraised value comes in lower than expected, it could lead to complications in your financing and might force you to renegotiate the sale price or forfeit some concessions.
- Debt-to-income ratio: Lenders assess your financial stability using your debt-to-income ratio (DTI). If you’re receiving seller concessions, they can affect your DTI calculations. For instance, if concessions are used to lower closing costs rather than the purchase price, you might end up with a higher DTI, which could influence your loan approval process.
Negotiating seller concessions
When it comes to negotiations, don’t be shy about asking for concessions! If you find a home you love, leverage the situation—especially if you notice any needed repairs or if the market is in your favor, this is something real estate agents are versed in. Just remember, it’s a give-and-take; sellers want a fair deal, too.
How can seller concessions artificially inflate the price of a home, what to watch out for?
Seller concessions can create a situation where the purchase price of a home appears higher than its actual market value. Here’s how that happens:
- Increased purchase price: When sellers offer concessions, they might do so by increasing the home’s asking price to accommodate the concessions. For example, if a seller wants to offer $5,000 in concessions but doesn’t want to lower the overall price, they might list the home for $5,000 more than its market value. This makes it seem like the buyer is getting a deal when, in reality, the price has been artificially inflated.
- Appraisal concerns: Lenders require an appraisal to determine the fair market value of the property. If the purchase price is significantly higher due to concessions, the appraiser may not agree with that price, especially if comparable homes in the area are selling for less. If the home appraises for less than the purchase price, it can complicate financing, potentially leading to a renegotiation of the sale price or a denial of the loan.
- Overstating buyer capability: When concessions are factored in, it can lead buyers to believe they can afford a higher-priced home. They might look at the lower upfront costs and think they’re getting a great deal, but if the price is artificially inflated, they could be stepping into a financial situation that’s not sustainable for them in the long run.
In essence, while seller concessions can provide immediate financial relief to buyers, they can also create a misleading picture of the home’s value. This is why lenders limit the amount of concessions—they want to keep the purchase price aligned with the property’s actual market value to ensure that buyers are making sound financial decisions.
Conclusion
Seller concessions can be a game-changer in the home buying process, providing you with extra financial flexibility and easing the burden of upfront costs. By understanding what they are and how they work, you can negotiate better terms and make your home-buying journey smoother. So, keep an eye out for those concessions—they could be the key to snagging your dream home! Happy house hunting!
If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.
