When buying a home, the process can be overwhelming, especially now that home prices have soared in the last couple of decades! To navigate these new prices, one of the many aspects that buyers need to understand is seller contributions and concession limits. 

Using these products can benefit both parties, the seller and buyer, but each loan product has its own format and limits, and it is essential to know the specifics when negotiating a contract. 

With our latest lending update in mind, we’ll explain what seller contributions and concession limits are, how they work, and their limitations, so you can decide if they’ll be a factor in your next real estate investment.

What Are Seller Contributions?

Let’s break this one down first! Seller contributions are a negotiation tool that buyers can use when purchasing a home. It’s a way for buyers to request that the seller pays for some of the closing costs associated with the home purchase (Closing costs are the fees associated with purchasing a home, like title search fees, loan origination fees, appraisal fees, and others).

It’s important to note that seller contributions are limited to a specific percentage of the home's sale price. The percentage limit can vary depending on the loan program used to purchase the home. 

For example, with a conventional loan, the maximum seller contribution is typically 3% of the sale price. With an FHA loan, the maximum seller contribution can be up to 6% of the sale price.

By having the seller pay for a portion of the closing costs, the buyer can preserve their cash for other expenses, such as moving costs, home repairs, and furnishings. Additionally, reducing closing costs can make home purchases more affordable and easier to manage.

While seller contributions help reduce the amount of money a buyer needs to bring to closing, they do not reduce the home's final sale price. 

If a buyer is purchasing a home for $200,000 and the seller agrees to contribute 3% ($6,000) towards closing costs, the buyer will still need to come up with the remaining $194,000 to complete the purchase.

You’ll need to consider this with the help of a real estate or loan agent. 

What are Concession Limits?

Now for something more associated with the seller. Concession limits refer to the maximum amount a seller can contribute to a buyer's closing costs. They can also vary depending on the loan program the buyer uses to purchase the home.

In essence, concession limits are put in place to prevent buyers from overpaying for the home to cover the closing costs. For example, if a home is listed for $200,000, but the seller agrees to pay $10,000 towards the buyer's closing costs, the actual sale price of the house is $210,000, which could be more than the home is worth.

The buyer and seller can negotiate the concession limit during the purchase agreement process. However, the limit cannot exceed the maximum limit set by the loan program.

For example, if a buyer uses an FHA loan, the maximum seller contribution is 6% of the sale price, and the home is listed for $200,000. The maximum concession limit the seller can contribute towards the buyer's closing costs is $12,000 (6% of $200,000). If the seller agrees to pay $10,000 towards the buyer's closing costs, the remaining $2,000 will be credited back to the seller. 

For sellers, offering concessions can help reduce the amount of time their home spends on the market. By making their home more appealing to buyers, sellers can sell their homes more quickly, reducing the carrying costs associated with owning the property.

Bottom Line

Both these products are essential aspects of the home-buying process that buyers and sellers should know. Seller contributions can help reduce the amount of money a buyer needs to bring to closing, while concession limits help ensure that the home's sale price is not inflated to cover the buyer's closing costs.

Sellers can benefit from offering seller contributions and concessions by making their homes more appealing to potential buyers. In a competitive market, offering concessions can set a seller's home apart from others, as it can help make the home more affordable and easier to purchase.

Buyers should work closely with their real estate agent and lender to determine the maximum seller contribution and concession limit allowed for their specific loan program. By understanding these limits, buyers can negotiate a fair purchase agreement that works for both parties.