When buying a home, seller concessions can be a meaningful part of the negotiation that can reduce your overall cost. In many cases, a seller concession is a credit the seller provides toward your closing costs, so you can bring less cash to the table, but there are other types of seller concessions, too.
Understanding how seller concessions work, the various types available, and what you can ask for depending on your loan type can put you in a stronger position to negotiate rather than leaving money on the table. Here’s everything you need to know about how to structure your seller concession requests in a competitive market.
What can seller concessions be used for?
Buyers can apply seller concessions to various closing costs, including lender fees, title charges, appraisal costs, recording fees, and discount points, subject to loan-program rules and lender approval.
Seller concessions can also cover prepaid items such as the first year of homeowners insurance, property taxes owed at closing, and prepaid mortgage interest, which accrues between your closing date and the end of the month.
Another option is to put the seller concession toward a mortgage rate buydown. In this scenario, the seller pays for discount points, which lower your interest rate for as long as you keep the loan and may provide long-term savings, rather than short-term cash relief.
Keep in mind that buyers cannot apply seller concessions to the required down payment or minimum borrower contribution.
How seller concessions work
Buyers and sellers negotiate seller concessions as part of the home purchase. Seller concessions appear on your Closing Disclosure as a seller credit or as individual seller-paid costs.
Each loan program limits seller concessions, usually based on a percentage of the home’s sales price or, in some VA contexts, the property’s reasonable value.
Keep in mind that other aspects of the homebuying process can affect your seller concession strategy. For example, if the home appraises for less than the contract price, it can create an appraisal gap. A concession toward closing costs may allow you to put more of your available cash toward that gap.
Seller concession limits by loan type
Every loan program has rules governing how much a seller can contribute toward your costs. Your lender will make sure the concession stays within that limit.
For conventional loans on a principal residence or second home, Fannie Mae bases the seller concession limits on the loan-to-value or combined loan-to-value ratio (LTV/CLTV). Your down payment affects your LTV. Your CLTV also includes other loans tied to the home, such as a second mortgage. More equity means the seller can contribute more. If you’re near a tier threshold, it’s worth revisiting your down payment strategy before you negotiate.
The VA guidelines are different from the other loan programs. For starters, a seller can pay the buyer’s allowable closing costs and normal discount points without those amounts counting toward the 4% cap on other concessions. The 4% can include payment of the VA funding fee, prepayment of property taxes and insurance, gifts such as appliances, and payoff of the buyer’s debts. One other distinction is that the VA calculates the 4% cap using the property’s reasonable value rather than the purchase price of the home.
Seller concessions, price reductions, & seller credits
The difference between a concession and a price reduction comes down to where the savings show up. A concession can reduce the cash you need at closing. A price reduction lowers the purchase price and may reduce your loan balance and monthly payment. You may be able to negotiate either option, but the right choice comes down to whether you need cash savings upfront or expect to stay in the home long enough for a lower loan balance to pay off over time.
Go for a price reduction if: You’re planning to stay in the home long enough for the lower loan balance to produce meaningful monthly and long-term savings.
Go for a concession if: You’re cash-constrained and want to keep your savings intact for reserves or move-in costs.
It’s also worth pointing out that people sometimes use “seller credit” and “seller concession” interchangeably. A seller credit usually refers to a specific dollar amount that the seller covers at closing, while seller concessions can include a broader range of negotiated benefits.
4 ways to use seller concessions
If you want to try to negotiate for a seller concession, here are four common options you can aim for:
Cover closing costs
Seller concessions can cover lender fees, title charges, appraisal costs, and other closing expenses. This approach allows you to write a smaller check at closing and keep more of your savings intact for reserves or move-in costs, with the seller effectively covering the closing tab.
The tradeoff: This option doesn’t directly reduce your mortgage rate or monthly payment.
Buy down your mortgage rate permanently
One mortgage discount point costs 1% of your loan amount. How much it lowers your rate varies by lender and market conditions, so ask your lender to show you the math specific to your loan before committing.
This type of concession can be appealing for rate-sensitive buyers since the monthly savings from a lower rate can add up over the life of the loan.
The tradeoff: This option may make more sense if you expect to keep the mortgage long enough for the monthly savings to outweigh the benefit of using the concession elsewhere.
Fund a temporary 2-1 buydown
A 2-1 buydown uses money from the seller to lower your mortgage payments for the first two years. In year one, you make payments as though your rate were two percentage points lower. In year two, you make payments as though it were one percentage point lower. You then pay the full amount based on your note rate from year three onward.
Builders may use temporary buydowns as a sales incentive instead of cutting the purchase price.
The tradeoff: Your monthly payment will increase in both the second and third years, so you will need to be prepared for those increases.
Take a repair credit instead of a fix
If the home inspection turns up problems, a repair credit can give you more control over the work after closing. You can shop for contractors on your own timeline rather than inheriting whoever the seller chose. Keep in mind that your lender may still require repairs involving health, safety, or habitability before closing.
The tradeoff: You’ll handle the repairs after closing, and you’re responsible for any costs that go beyond the credit.
Pros and cons of seller concessions
Pros
- Reduces cash needed at closing
- Can fund a rate buydown for potential long-term savings
- Keeps your savings liquid for post-closing expenses
- Can help preserve cash for repairs after closing
- Available across all major loan types
Cons
- May require a higher purchase price to offset the seller’s contribution
- Reduces seller net proceeds, which can make your offer less competitive
- Loan program limits apply
- A higher purchase price can create an appraisal gap if the home appraises for less
- You generally can’t receive an unused concession amount as cash back at closing
How to negotiate seller concessions
Seller concessions are typically easier to negotiate in a buyer’s market, when sellers are competing for buyers. As with any negotiation, the key is to be strategic. If you’re already negotiating a lower price, a home warranty, and a flexible closing date, stacking a concession on top could kill the deal. Choose your priority before submitting the offer.
In some cases, you may be able to structure an offer with a slightly higher price and a seller credit so the seller’s net stays similar while preserving your cash at closing. For this approach to work, the home must appraise high enough to support the financing, and the concession needs to stay within program limits.
Get any seller concession in writing. A verbal agreement isn’t enough. If the purchase contract or a written addendum doesn’t spell out a seller concession clearly, don’t count on it happening.
The takeaway
Seller concessions can be a useful tool in a buyer’s negotiation kit. The key question is figuring out if a concession makes sense in your market and, if so, which type of concession to ask for. Covering closing costs is a practical option if you need to preserve cash, while a permanent buydown may offer longer-term savings and a 2-1 buydown can offer short-term payment relief.
Finally, be familiar with your loan program’s limits, come to the negotiation with a specific dollar figure, and get everything in writing.
Frequently asked questions
Are seller concessions a good idea?
Seller concessions, especially in a buyer’s market, can be worth seeking if you want to reduce your closing costs or even your mortgage interest rate. Whether they’re a good idea depends on the housing market and how they fit in with your other homebuying strategies.
What does $5,000 in seller concessions mean?
A $5,000 seller concession means that the seller of the home is contributing that amount to cover part of the buyer’s closing or transaction expenses.
Are there limits on seller concessions?
Each loan program sets its own rules and limits on the amount of allowable seller concessions. Programs generally calculate the limit as a percentage of the home sale price or appraised value (or, for VA loans, the established reasonable value of the property). Seller concession limits generally range from 2% to 9%, depending on the loan program. VA guidelines treat normal seller-paid closing costs separately from the 4% concession cap.
Can I use seller concessions for a down payment?
No, you cannot use seller concessions for a down payment. Your down payment must come from a source your loan program allows.
Is a price reduction better than a seller concession?
Price reductions and seller concessions can each benefit buyers, but one isn’t necessarily better than the other, and in some markets, you may be able to negotiate for both. Price reductions may allow you to borrow less and can produce long-term savings, while seller concessions help save on upfront costs at closing and preserve more of your savings.