A seller concession helps a borrower to pay some or all of their closing costs. The realtor write a seller concession into the purchase agreement usually before placing a bid on a property. Anywhere from 3%-6% (this is a percentage of the purchase price) is a typical seller concession. This is helpful for borrowers who do not have the necessary amount of money to pay for closing costs and for borrowers who would rather hold onto their money instead of tying it up into their mortgage.
Example of how a seller concession works:
House for sale, asking price 100,000, you place a bid for 98,000 and request the seller pays 3% of your settlement charges. Seller concession amount is equal to $2,940 to be used to pay for your closing costs.Make sure the real estate agent you are working with knows to write your offer to purchase with seller concessions. It may cause problems and delay the purchase of your new home if the realtor has to ask for an amendment to the original offer to purchase.
Most lenders will not allow you to use the seller concession to profit from a purchase. You can use the money to payoff costs but not get cash in hand at the end of escrow.
The market is turning from a seller's market to a buyer's market. Therefore to keep housing prices stable, sellers may be more willing to offer concessions. Depending upon the lender, seller concessions may only be limited to non recurring costs, such as title insurance, appraisal costs, points paid, interest rate buydown, broker fees, etc. This means then that recurring costs could be covered by the seller - 6 months PITI, homeowners insurance, etc.
One unique seller concession is for the sellers to pay points for the buyers to lower their interest rate. What a great incentive for a seller to offer to lower the buyer's mortgage rate by 0.500, 0.750, or 1.000 %!
If you have little or no cash to purchase your home, seller concessions are a great way to get into a home with little or no money out of pocket. Be sure to speak to both your realtor AND mortgage professional before signing the P&S to ensure it is worded properly.
If you do not qualify for a seller assist, the seller will not agree to one, or it does not cover enough of the closing costs you may want to consider a 103% mortgage program. This type of loan finances an additional 3% for the purchase price to help pay for the closing costs.
By structuring a sales contract to include a sellers concession to assist with closing costs, you can keep more of your savings as a cushion or to help pay for any necessary repairs on your new home.
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