By Sarah Sharkey

The closing costs on a home purchase add up quickly. Seller concessions can help lessen the burden of this upfront expense.

With seller concessions, the home seller in a real estate transaction agrees to cover some of the homebuyer’s closing costs, either specific expenses or a percentage of the total costs. The result is lower upfront costs for the buyer to pay.

Since closing costs can typically be anywhere from 2 percent to 5 percent of the home’s price, getting any of these items covered by the seller can be a big help to the buyer — at least initially.

How do seller concessions work?

A homebuyer can ask the seller for concessions at any point in the negotiation process and for any reason. Two common reasons to ask for concessions:

  • Home repairs – The buyer asks the seller for a concession to cover the cost of a home repair, typically a necessary fix.
  • Overpriced property – The buyer asks the seller for a concession because the home is priced too high (at least from the buyer’s perspective).

If the seller agrees to concessions, the funds will come out of the proceeds of the sale. The seller won’t need to come up with cash for closing day; essentially, the buyer is adding the costs the seller agreed to pay to their mortgage. While this saves the buyer from bringing money to the closing, they’ll be paying for it over time with their loan.

Keep in mind: Buyers can’t ask sellers for concessions that exceed the amount of their closing costs. In other words, you can’t get cash back through seller concessions.

Allowable concessions by loan type

The type of mortgage you’re using to buy the home, as well as the size of your down payment, impacts the concession amount you can ask for. 

If you’re getting a conventional loan for a primary or second home, and:

  • Have a down payment of less than 10 percent, you can ask for seller concessions: Up to 3 percent of the purchase price
  • Have a down payment of 10 percent to 25 percent: Up to 6 percent
  • Have a down payment of more than 25 percent: Up to 9 percent 

If you’re getting a government-insured loan, the seller concession limits are the same regardless of down payment amount:

  • Up to 6 percent for FHA loan borrowers
  • Up to 4 percent for VA loan borrowers
  • Up to 6 percent for USDA loan borrowers

The seller doesn’t have to agree to these maximum amounts of concessions, however. In fact, in a seller’s market, it can be challenging to get a seller to agree to concessions at all.

What can concessions cover?

Seller concessions can cover a range of closing costs, including:

  • Prepaid homeowners insurance, mortgage insurance, or property taxes
  • Title insurance
  • Loan origination fee
  • Appraisal and home inspection fees
  • Recording fee
  • Attorney fee
  • Mortgage points

Why would a seller agree to concessions?

If a home seller has trouble offloading their property, agreeing to concessions could be one way to seal the deal. This can be especially important if the seller is on a tight timeline to move.

When there are more homes for sale than buyers out looking, concessions can also help drive interest in a buyer’s market.

An eager seller is usually more willing to agree to concessions.

How to negotiate seller concessions

As the homebuyer, you can ask for seller concessions in your initial offer or negotiate for them afterward.

Before you do, though, consider whether you’re in a buyer’s or seller’s market. If you’re in a seller’s market with limited listings, sellers will be much less likely to agree to concessions since they can more easily find another buyer.

If you decide to negotiate concessions, work with your real estate agent to determine the best strategy. You might want to limit other requests or complications with your offer, for example, if your main goal is to obtain concessions.

Ultimately, seller concessions can help buyers with closing costs, but they aren’t a given. The seller has to agree, and if you’re competing in a low-inventory market, it might make more sense to forgo this ask so you can make a deal happen and close on a home.

This article is also posted on Bankrate here.