When I purchased my first home, I was 23 and I was totally in the dark. I had a small chunk of change in the bank to cover the down payment, a little bit of income, enough to cover the monthly mortgage payment and, wow, I qualified. Then one day the lender mentioned closing costs. This was the first time I ever heard of this and I was already under contract. My stomach sank. My stomach sank and nearly touched the floor when I heard “approximately $10,000 is what the closing costs will be.” I was worried about affording replacing the rickety back door, never mind $10,000 in closing costs. “Well, guess I’m renting an apartment” I thought to myself, “Who do I tell that I’m backing out?
Then the lender mentioned a Seller’s Concession. There was a light through the darkness! Now, many years later, I’m a mortgage expert and can explain this to those, like my young self, who had no idea what this was.
A Seller’s Concession is an agreement where the seller agrees to pay all or some of the closing costs. No, this does not come out of their pocket as a gift by any means. They basically agree to raise the sale price of their home by the closing cost amount and allow you to keep that amount to cover those costs. Another way of looking at it is that you are rolling in the closing costs to your mortgage and paying them back over the term of your loan. This is something the seller must agree to and is presented during the purchase offer as part of the negotiation.
A seller concession can also be used as a smart financial tool. For example, if you were to find a home that needs a few upgrades it may be beneficial to keep the money in your pocket for the construction costs rather than putting it toward closing costs.
There are a few stipulations to keep in mind when considering this. Concessions do not give home buyers cash back at closing, nor is it used to cover the down payment. The fees that the concession may cover are the mortgage associated costs such as the appraisal and application fee, the property taxes, attorney fees and title company fees. In addition, there is a limit on seller concessions. The cap on the amount you can roll into your mortgage depends on the type of loan.
To learn more, reach out to an experienced lender.