Can Seller Concessions Be Used for Repairs?

In a real estate transaction, understanding how financial components interact is important for both buyers and sellers. A common question arises regarding seller concessions and their potential use for property repairs. While seller concessions can significantly reduce a buyer’s upfront costs, their direct application to repair expenses is subject to specific limitations and lender guidelines.

Defining Seller Concessions

Seller concessions are financial contributions made by the seller to the buyer as part of the home sale agreement. These contributions offset costs the buyer would otherwise incur. Their purpose is to alleviate the buyer’s financial burden at closing, making homeownership more accessible.

Common uses for these include covering closing costs, such as loan origination fees, appraisal fees, and title insurance. They can also be applied to prepaid expenses like property taxes or homeowner’s insurance premiums.

These concessions function as credits applied directly on the Closing Disclosure, reducing cash the buyer needs to bring to the transaction. Seller concessions are not direct cash payments to the buyer. Instead, they are credits that reduce the buyer’s overall financial obligation at closing.

Lender Guidelines on Concession Usage

Lenders impose regulations on how seller concessions can be utilized, particularly concerning property repairs. These rules protect the lender’s interest, prevent artificial inflation of property values, and ensure the buyer retains sufficient equity in the home. The maximum percentage of the loan amount covered by seller concessions varies depending on the loan program and the buyer’s loan-to-value (LTV) ratio.

For conventional loans, which follow Fannie Mae and Freddie Mac guidelines, concession limits are tied to the buyer’s down payment:
If the down payment is less than 10%, seller concessions are capped at 3% of the sales price.
For down payments between 10% and 25%, the limit increases to 6%.
For those exceeding 25%, concessions can be as high as 9%.
Investment properties have a limit of 2% regardless of the down payment amount.

Federal Housing Administration (FHA) loans permit seller concessions up to 6% of the lesser of the sales price or appraised value. These funds can cover various closing costs, but they cannot be used for the buyer’s down payment.

Department of Veterans Affairs (VA) loans allow sellers to contribute up to 4% of the purchase price for specific concessions, including customary closing costs. These can include the VA funding fee, prepaid taxes, or paying off certain buyer debts. For U.S. Department of Agriculture (USDA) loans, the seller can contribute up to 6% of the purchase price, but the total concessions cannot exceed the actual closing costs, with any excess reducing the loan amount.

Across all loan types, lenders prohibit “cash back” to the buyer. Concessions must be applied as credits toward eligible closing costs and cannot result in the buyer receiving cash at closing.

Handling Property Repairs in a Transaction

Addressing property repairs during a real estate transaction involves several established methods, none of which typically involve direct funding through seller concessions. The approach depends on the nature of the repair and the agreements between the buyer and seller.

One common method involves the seller agreeing to complete specific repairs before the closing date. The seller directly funds and oversees these repairs, ensuring the property meets agreed-upon conditions. Seller concessions are not used to pay for these repairs, as the seller assumes the direct financial responsibility.

Lenders may require certain repairs for a loan to be approved, such as those related to health, safety, or structural integrity. These “lender-required repairs” must be finished before closing, and seller concessions cannot be directly applied to cover these costs. The responsibility for funding these mandatory repairs falls to either the seller or the buyer, as they are a condition of the loan.

If a buyer wishes to undertake repairs not mandated by the lender, these are typically performed after the closing. Seller concessions can indirectly assist the buyer by reducing their closing costs. By lowering the cash needed for closing expenses, concessions can free up the buyer’s own funds for post-closing repairs or renovations.

A “repair escrow” might be established, where funds are held back at closing to ensure minor, lender-required repairs are completed after the sale. These escrowed funds usually come from the seller’s proceeds, not from the seller concessions applied to closing costs. The lender or a title company controls these funds, releasing them once the repairs are verified as complete. General seller concessions, however, are not typically held in escrow for future buyer-requested repairs.