Now that the housing market is turning in favor of home buyers, the phrase “seller concessions” may be becoming too common.
Over the past decade, home sellers have had the upper hand, often offloading their properties well above list value.
In many cases, home buyers were forced to bid, believing they were lucky enough to get the chance.
But now that mortgage rates have doubled, and home prices have bottomed out, the situation is quite the opposite.
If you’re a potential home buyer, you need to know what seller concessions are and how they work.
What are vendor discounts?
A seller’s concession is a financial contribution from a home seller that reduces the home buyer’s closing costs.
Vendor concessions ease that burden, making it easier to do Qualify for Home Loan and get a property.
Funds are usually generated through a slightly higher contract value, which lowers the buyer’s out-of-pocket expenses.
However, this means the borrower will end up with a larger loan amount, and will finance those costs over time through higher monthly mortgage payments.
For example, if a buyer offers $360,000 for a property with $10,000 in seller concessions, the seller may say, “Sure, it’s all yours for $370,000.”
You are not really getting the money for free as the purchase price is increased by the requested amount. But it reduces the amount of cash due at closing.
In essence, this means that you are paying for that $10,000 through a higher sales price over time rather than at closing.
Keep in mind that the property must appraise for that high amount in order for the mortgage financing to work.
And your down payment may change as a result, assuming you keep your loan-to-value (LTV) Ratio same.
While they weren’t popular when the housing market was red hot, seller concessions have since become much more common as buyers gain the upper hand.
in fact, a new report good The Redfin study found that a record 42% of home sales in the fourth quarter of 2022 included concessions to the buyer.
What can vendor discounts be used for?
The proceeds from seller concessions can be used for a variety of costs associated with the purchase of a home.
This may include lender fees, third-party loan fees, taxes, insurance, HOA dues. shoppingRepairs/Improvements, and much more.
Of course, if your inspection finds that actual repairs are necessary, they should reduce the sale price or be taken from the seller’s proceeds without increasing the sale price.
loan origination fee
Homeowners Insurance Premium
mortgage insurance premium
prepaid items for impound account
What cannot vendor concessions be used for?
Seller discounts typically can’t be used for certain items, such as a down payment. Nor can the buyer receive cash through the seller’s contribution.
For this, the concessions you get cannot exceed your limit closing costSo make sure you don’t ask for more than you need.
If you end up with an excess, you can find out how to pay mortgage discount points To lower your mortgage rate. Or load a mortgage foreclosure account.
In addition, the concessions may not be used to meet reserve requirements, or minimum borrower contribution requirements.
And the amount of vendor concessions should be less/less than the limit prescribed by the associated loan type used for financing.
Loan type wise seller discount limit
Fannie Mae and Freddie Mac refer to seller concessions as “interested party contributions” or IPC for short.
Fannie Mae treats IPC as either financing concessions (more common) or sales concessions (less common).
As they consider sales concessions, these are “IPCs that take the form of non-real items,” such as cash, furniture, cars, running expenses, with financial concessions exceeding Fannie Mae limits.
good news lender credit Even though the mortgage lender is considered an interested party, IPCs are not considered.
So you can get lender credits to reduce your closing costs and credits from the home seller (via rebates) to reduce your outlay.
On conforming loans, seller concessions are limited to 2-9% of the sale price, as seen in the table below.
If the property is a primary residence or second home, the range ranges from 3-9% depending on your loan-to-value (LTV) ratio.
Higher the down payment, more you can get in concessions. To calculate seller discounts, simply multiply the offered sale price by the percentage allowed based on LTV.
Note that non-genuine items and IPC in excess of the limit are considered “sales concessions” and the property sale value will need to be reduced by the value of such sales concessions while calculating the LTV ratio for underwriting/eligibility purposes.
For investment properties, IPCs are capped at 2%, regardless of LTV. So if the purchase price was $300,000, you would be limited to $6,000.
if this a homepath propertyMaximum IPC is 6% of the purchase price, even if above 90% LTV.
Either way, most borrowers who take out USDA loans don’t put anything down, so it’s unlikely.
However, “normal discount points and payment of buyer’s closing costs” need not be included in that hard limit. In other words, it may be possible to get over 4%.
Maximum Vendor Discounts On jumbo loan Will differ as they are not subject to a set of guidelines like the above loan types. But there’s a good chance the limits will stay the same.
Make sure your real estate agent, loan officer (or mortgage broker), and vendors are aware of these limitations.
The reason why seller concession limits are in place in the first place is to ensure that home prices are not artificially inflated, and to ensure that borrowers are properly qualified.
vendor concession example
|20% down payment||$72,000||$74,000|
|out of pocket expenses||$15,000 (plus down payment)||$5,000 (plus down payment)|
Let’s look at an example of seller concession in action. Imagine you’ve found a home you love and have an offer of $360,000, but need $10,000 in closing cost assistance.
The seller says no problem, we can sell for $370,000 and give you a $10,000 credit to cover your costs.
you put 20% downSo the down payment goes up by $2,000 for a slightly higher selling price.
Seller discounts do not change the interest rate you qualify for, which is 5.75% in any case.
What changes is the loan amount other than the down payment, which increases from $288,000 to $296,000.
As a result, the monthly payment also increases from $1,680.69 to $1,727.38, a difference of $46.69.
Sure, it’s about $50, but you might not notice it. Although you’ll certainly see $10,000 less in out-of-pocket expenses at closing.
And that extra cash can come in handy when it comes to making your first mortgage paymentOr presenting your new digs.
Seller Discounts vs. Lower Prices (or Price Reductions)
Now you must be thinking that why not take a lower price instead of concessions. That way you’ll need a lower down payment and you’ll also have a lower mortgage payment.
The problem, as seen in the example above, is that a slightly lower selling price does little to move the needle.
The extra $50 per month is negligible for most home buyers buying a property worth around $400,000.
But getting $10,000 to reduce your actual out-of-pocket expenses is huge. After all, most Americans have wasted little time saving.
So putting down $10,000 in addition to other home-buying expenses could empty your bank account.
Instead, you choose to make a slightly higher mortgage payment and hopefully keep your savings.
This is a similar argument for taking lender credit instead. paying mortgage pointsThe more that is kept in your pocket.
The only real downside to concessions, other than the higher payout, is the higher tax basis on the higher selling price. But again, it’s not going to be a huge difference.
Are Vendor Concessions a Good Deal?
From the home buyer’s perspective, seller concessions can reduce the financial burden at closing, but increase the purchase price.
So it is basically a case of paying less today, but paying more in the future through a larger loan amount. Still, it can keep things cheaper and more liquid.
Eventually, you’ll need extra cash after buying a home for mortgage payments, moving costs, new furnishings, and more.
If possible, it may be better to ask for a repair credit instead, in which case the purchase price doesn’t increase. This is why a quality home inspection is so important.
It may even be possible to get the best of both worlds if you offer a little less and ask for concessions. This can be a better way to negotiate vendor concessions.
Using our example above, you offer $350,000 with a $10,000 discount, bringing the sales price down to the original $360,000.
You get $10k in closing cost assistance without raising the sale price.
Be strategic and make sure your real estate agent gets it.
For the home seller, offering concessions can be a relative no-brainer if the purchase price is adjusted as a result, especially in a down market.
You’re basically expanding the pool of eligible buyers with not much on your part.
Of course, it may very slightly adjust the real estate agent’s commission based on the difference in the sale price.
But if the vendor concessions get you to the finish line, they can be worth it. Not only in finding a willing/able buyer more easily, but also one who has an easier time qualifying for a mortgage.
Advantages and Disadvantages of Vendor Concessions
- Reduces out-of-pocket expenses if cash is hard to come by
- Qualifying for a home loan could get easier (property-wise)
- Can keep you liquid after an expensive home purchase
- May increase your monthly mortgage payment only slightly
- Allows purchase of other items after closing such as furnishing, moving, etc.
- Can attract more home buyers (if you are a home seller)
- Will likely increase the sale price of the property (by the amount accepted)
- Your monthly mortgage payment will be higher (larger loan amount)
- Closing costs are paid over time instead of upfront (increasing interest expense)
- higher property taxes if the sale price is higher