What Are Concessions When Buying a House?

Buying a home involves various financial considerations beyond the purchase price. Buyers encounter upfront costs, including down payments and closing expenses, which can significantly impact affordability. Concessions are common arrangements designed to facilitate sales by adjusting financial obligations between parties in a real estate transaction.

Defining Concessions

Concessions in real estate are financial contributions or benefits a seller provides to a buyer to facilitate a home sale. This arrangement is formalized as an agreement between the buyer and seller. From the buyer’s perspective, concessions can significantly reduce the cash needed at closing, making homeownership more accessible and affordable. This is particularly beneficial for first-time homebuyers who might face challenges covering both a down payment and various closing costs.

From the seller’s viewpoint, offering concessions makes their property more attractive, especially in a buyer’s market. It can also expedite the sale process, allowing the seller to close the deal more quickly. Concessions can be structured as a percentage of the home’s purchase price or as a specific fixed dollar amount. These contributions encourage the successful completion of a real estate transaction for both parties.

Types of Concessions

Seller concessions can take several forms, with the most common being contributions toward the buyer’s closing costs. Closing costs are fees associated with finalizing a mortgage loan and transferring property ownership, typically ranging from 3% to 6% of the home’s price. These often include expenses like loan origination fees, appraisal fees, title insurance premiums, recording fees, and attorney fees. Sellers may also contribute to prepaid expenses such as property taxes and homeowners insurance premiums due at closing.

Another type of concession involves the seller contributing to a home warranty, which covers repairs or replacement for major home systems and appliances. Buyers might also request credits for necessary repairs uncovered during a home inspection. Instead of performing the repairs themselves, sellers can offer a credit at closing to offset the buyer’s future repair expenses. Sellers may also offer to pay for mortgage discount points, which are upfront fees paid to the lender to reduce the buyer’s interest rate.

Negotiating Concessions

The negotiation of concessions typically occurs as part of the purchase agreement, often initiated with the buyer’s initial offer or after a home inspection. Buyers, often with a real estate agent’s guidance, can propose specific concession amounts or types to the seller. Market conditions play a significant role in a seller agreeing to concessions; they are generally more common in a buyer’s market.

When requesting concessions, buyers should be specific about what they are asking for. Providing a detailed breakdown of closing costs that a credit would cover can help the seller understand the request. While offering a slightly higher purchase price for concessions can roll some closing costs into the loan, this approach has financial implications over time. Sellers are not obligated to agree, and negotiations may involve counter-offers until mutually acceptable terms are reached.

Financial Implications and Limitations

Concessions have financial implications for a home purchase, particularly concerning the mortgage loan and property appraisal. Lenders for conventional, FHA, VA, and USDA loans impose limits on seller concessions, often called “interested party contributions.” These limits prevent inflated home prices and ensure loan integrity. The specific cap varies depending on the loan type and, for conventional loans, the buyer’s down payment amount.

For conventional loans, seller contributions typically range from 3% to 9% of the purchase price, with higher percentages for larger down payments. For example, a down payment of less than 10% usually limits concessions to 3%, while a down payment exceeding 25% might allow up to 9%. FHA and USDA loans generally permit seller concessions up to 6% of the sales price. VA loans allow sellers to cover all reasonable loan costs, plus up to 4% of the purchase price for items like funding fees or paying off buyer debts. Total seller concessions cannot exceed the buyer’s actual closing costs.

Seller concessions can impact the home’s appraised value. If concessions inflate the sale price to cover the seller’s contribution, the property may not appraise for the higher amount. Lenders base the loan amount on the lesser of the sales price or appraised value. An appraisal gap could reduce the loan amount or require the buyer to bring more cash to closing. Rolling concessions into the loan increases the principal balance, leading to higher monthly payments and greater total interest paid.