What Are Seller Concessions and How Do They Work?

There are certain costs associated with buying a home, such as getting the property inspected, conducting a title search, originating a home loan, or even making repairs to a property that’s not entirely turnkey. All of these can add up, especially when you’re already handing over funds for a down payment and home appraisal. 

Seller concessions are one way to reduce upfront or substantial costs for buyers and can help make the transaction smoother for both sides. Whether you’re a seller trying to make your listed home more enticing to potential buyers, or a buyer looking to get the best deal and reduce upfront expenses, seller concessions have the potential to benefit everyone. Here’s a look at how they work.

Understanding Seller Concessions

Seller concessions are financial incentives offered by homeowners to attract potential buyers, encourage higher or faster offers, or close deals with existing buyers. A seller provides additional financial support through these concessions by covering specific expenses at or before closing. This can make it easier for certain buyers to submit an offer, negotiate terms, or close the deal with peace of mind.

Closing Costs

Most homebuyers face significant upfront expenses, including closing costs. In addition to a down payment, buyers come to the closing table with cash for things like title insurance, mortgage loan origination fees, prepaid property taxes, prepaid homeowners insurance premiums and appraisal fees. 

According to the Consumer Financial Protection Bureau (CFPB), median closing costs currently hover around $6,000. Home sellers may consider paying for (or crediting back) some of these closing costs to facilitate a sale, entice buyers, or make a more competitive offer. This reduces the buyer’s out-of-pocket costs at closing and typically doesn’t cost the seller upfront. The funds are typically deducted from the money paid to the seller during the closing process. 

Home Warranty

A home warranty gives buyers peace of mind that they aren’t stuck with an unexpected repair bill if anything breaks in their new home. This could sweeten the deal if the home is older or has outdated appliances and systems that could fail.

These plans typically cost a few hundred dollars a year, but that’s still cheaper than installing a new HVAC system or water heater. It’s also less expensive than replacing most large appliances before closing. 

Repair or Renovation Credits

A renovation credit can make an older or outdated property more enticing to potential buyers. If a home inspection finds that the property or certain systems need repairs or replacement, seller credits covering the cost can be offered as a remedy.  

These credits usually provide mutual benefits: 

• The buyer gets some say in the process. Rather than replacing an outdated carpet or failing appliances, seller credits allow the buyer to shop around, choose what’s installed, and make the repairs on their own time. 
• Closing isn’t delayed. If a home inspection finds that larger repairs must be made, it could delay closing by many weeks. A seller credit toward those repairs will help the transaction close on time.  
• The credits are negotiable. Rather than covering the entire cost of a large repair, the seller can offer a credit that covers a portion of the expense. This way, the seller can acknowledge that repairs are probably necessary without footing the entire bill themselves. 

Interest Rate Buydown

While mortgage interest rates are still competitive from a historical standpoint, they are notably higher than the all-time low rates of just a few years ago. A buyer eyeing those 2020-2022 interest rates with envy may be enticed by a seller who offers to temporarily buy down their rate as a concession. 

Interest rate buydowns are an optional mortgage feature in which a buyer can purchase a temporarily reduced rate for the first year or two of the home loan. This reduces the monthly mortgage payment and the total interest paid over the life of the mortgage, but it does come at a cost. 

In some cases, a seller agrees to pay for this buydown as a concession instead of negotiating the total purchase price of the home. From a buyer’s perspective, the advantage is that a rate buy-down will lower their monthly payments more than a price reduction would. 

How a Buydown Works

The seller offers $8,000 in credits toward a 1-1 interest rate buydown, which drops the buyer’s rate to 6.25% for the first two years of the loan. This gives them a temporary $3,045 monthly payment and a savings of $329 per month for the first two years.

• Monthly payment for first two years: $3,048
• Total savings through year two: $7,896

If the seller had instead offered an $8,000 price reduction, the buyer’s monthly payment would decrease by only $49, which may not be as significant for buyers concerned about upfront costs.

	Purchase Price	Loan Amount (90%)	Interest Rate	Monthly Payment
No Concession	$550,000	$495,000	7.25%	$3,377
1-1 Buydown Concession ($8,000)	$550,000	$495,000	6.25%(first two years); 7.25% after	$3,048 (first two years)
$8,000 Price Discount	$542,000	$487,800	7.25%	$3,328

Benefits of Seller Concessions

For buyers, seller concessions are always a way to save money. The advantages include:

• Reduced upfront closing costs
• Increased the buyer’s purchasing power
• Ability to make a more competitive offer
• Improved cash flow after closing

If issues are found during a home inspection or the home is outdated, seller concessions also give both sides a way to fix those concerns without delaying the closing.

How to Negotiate Seller Concessions as a Buyer

Seller concessions are always possible, especially in a neutral or buyer’s market. Here are some tips if you’re looking to maximize your concessions or negotiate.

• Research the property. Knowing the market value of a property will help you determine what it’s worth and how much wiggle room you might have with a seller.
• Understand your mortgage loan options. If you know what you’re expected to bring to the closing table, how much your loan will cost you, and what you’ll likely pay in interest, you can better calculate how much certain concessions would save you.
• Make a strong offer. A competitive purchase offer with a reasonable concession request is more likely to get accepted (or at least countered).
• Figure out your priorities. Decide which concessions are most important to you based on your biggest concerns. Consider a rate buydown concession if your monthly payment is the primary concern. For an outdated home, a renovation credit could allow you to update the property however you want without delaying your close date.
• Be prepared to walk away. Some seller concessions might be a deal-breaker to you or the seller. Be prepared to move on if both sides can’t reach an agreement or know where your line is.

Seller Considerations for Offering Concessions

When sellers offer concessions, they benefit by making their listing more competitive and marketable than other homes for sale. A concession can be a great tool for bridging a price gap, meeting sellers in the middle and pushing a sale along faster. 

Concessions are less common in a seller’s market when buyers don’t have the upper hand, or demand exceeds the number of available homes. 

Seller Concession Limits Exist on Some Loans

It’s important to note that most loans restrict the limits on seller concessions to a percentage of the home’s purchase price.

• VA loans: Up to 4% of the purchase price.
• Federal Housing Administration (FHA) loans: Up to 6% of the purchase price or appraised value (whichever is lower).
• U.S. Department of Agriculture (USDA) loans: Up to 6% of the purchase price.
• Conventional loans: Between 2% and 6% of the purchase price.

With conventional home loans, the limit on seller concessions depends on the buyer’s down payment and even the property type. 

• Up to 10% down payment: Seller concessions are limited to 3%.
• 10% to 25% down payment: Seller concessions are limited to 6%.
• 25% down payment or more: Seller concessions are limited to 9%.
• Investment properties: Seller concessions are limited to 2%, regardless of the down payment.

Concessions allow buyers and sellers to negotiate a home purchase offer in a way that makes everyone happy. They can range from repair credits to buyer’s closing cost reimbursements and even the option to buy down the loan’s interest rate. The right concessions for you and your transaction depend on the details of the home, buyer priorities, the strength of the market and even the loan type used to purchase the home. 

If you want to learn more about common concessions or are interested in making a contingent offer on a home, contact a licensed real estate agent in your area for personalized guidance.