Buying a home is exciting, but it’s also expensive. You’ll have to cover more than just a down payment upfront. From a home inspection and title search to real estate commissions and broker fees, closing costs typically range from 2% to 5% of a home’s purchase price.
Fortunately, you have options. One is to ask the seller to cover some of the closing costs, freeing up your cash flow and giving you some financial breathing room.
What is a Seller Concession?
In real estate, a seller concession is when a home seller pays for some or all of the closing costs associated with the sale of their property. Seller concessions are usually for either a percentage of the total closing costs or for specific expenses.
For example, a seller might agree to pay for half of the closing costs or only for transfer taxes.
It’s important to understand that when a seller agrees to cover a portion of your closing costs, it doesn’t mean they’re doing it for free. Instead, these costs are typically rolled into your mortgage loan instead of having to come out of your pocket.
Essentially, the costs are being prepaid by the seller, who will get them back from your lender when you close on the home.
Let’s say you’re buying a house for $250,000 and the total closing costs are 3%, or $7,500. If the seller agrees to pay for all of the closing costs upfront, you can expect the purchase price to increase to $257,500.
This would mean your down payment and loan amount would increase as well. For example, to put 20% down, your down payment would increase from $50,000 to $51,500, and your mortgage loan would go from $200,000 to $206,000.
Because your loan would increase, so too would your mortgage payments and the interest charges you’d accrue over time.
Ways to Get a Seller to Cover Your Closing Costs
Concessions offer limited benefits to home sellers, so they only make sense in specific circumstances. They might be on the table when a seller’s motivated to sell the home quickly, or when a home inspection identifies repairs that they don’t want to make before the sale goes through.
There are a few different ways you can increase your chances of getting the seller on board.
1. Pay the Full Asking Price
If you want to propose seller concessions, avoid making a lowball offer. Instead, make an offer for the full asking price of the property to demonstrate that you’re serious about buying the home and that you aren’t just trying to take advantage of the seller.
Think of it from the seller’s perspective. Which would you be more likely to accept: an offer at full price with a request to cover a percentage of the closing costs, or an offer that’s not only below asking but that also wants you to consider seller concessions?
It’s important not to offend the seller by asking for too much. Be reasonable and consider what seller concessions are worth to you. If you need the additional cash to cover expenses, getting on the seller’s good side is your best bet, and that starts with a respectful and fair offer.
2. Be Prepared to Close
Home sellers are more likely to accept seller concessions when they’re motivated to sell quickly. This means if you’re interested in having your closing costs covered, you need to be ready to close on the house right away.
For example, you may not be able to ask for an extended possession date or to hold off on making an offer while you shop around.
Prepare yourself for a quick closing by getting a preapproval and having the cash to cover at least some of the closing costs on your own, such as a home inspection.
Sellers who have already purchased another property or who are waiting for their home to sell to make an offer are more likely to accept offers with a quick turnaround.
3. Don’t Make Excessive Demands
Home sellers are ready to sell, not to make upgrades and do renovations. Of course, they should still be responsible for covering any repairs that failed a home inspection. But if you’re hoping for seller concessions, you should be ready to accept a house as-is, aside from safety and structural issues.
Avoid making cosmetic demands in your offer, like replacing old carpeting or repainting a room. You can easily take on these projects in your own time, and the less money a seller has to put into their property, the more likely they will be to offer you a seller concession.
4. Be Willing to Negotiate
Sellers may be struggling with limited cash flow during a home sale just as much as you are. This can leave them with little room to cover your closing costs, even if they want to. Negotiating what you’re asking for will help you both to reach an amount that you can afford.
For example, if your closing costs are $7,500, and you only have $4,000, ask the seller to cover the remaining $3,500.
Remember that you’re essentially asking the seller for a favor, so the more you’re willing to accommodate them, the more likely they are to accept.
5. Pay Attention to the Market
One of the biggest home buying mistakes you can make is buying in the wrong market. You have a much better chance at having a seller cover your closing costs in a buyer’s market than in a seller’s market. In a buyer’s market, there are plenty of homes for sale, and sellers often have to compete against one another to attract offers.
For example, in a buyer’s market, you may benefit from lower list prices and upfront seller concessions on top of lower mortgage rates when purchasing a new home.
Talk to your realtor about the state of the market before you start the home buying process so you know what to expect. If seller concessions are important to you, use the market to your advantage.
When Should You Ask a Seller to Pay Closing Costs?
Since seller concessions increase your own expenses in the long run, including interest charges and possibly a larger down payment, you may be wondering how they’re beneficial.
You might ask for a seller concession if:
1. You Need Cash for Renovations or Emergencies
Seller concessions help to keep you from becoming cash poor when buying a home. Adding closing costs to your mortgage instead of covering them out of pocket will leave you with more cash to pay for your move, any necessary renovations, and emergency expenses.
This is especially useful if you’re buying an older home and know that you’re going to have to put some money into it in the near future.
2. Your Preapproval Can Accommodate Closing Costs
A preapproval is given after a bank or lender reviews detailed aspects of your financial situation, such as your credit score, income, and job history.
And if you secured a preapproval before starting your home search, you know that it has a limit. A borrower can only ask for seller concessions if they have enough wiggle room in their home loan preapproval to cover the associated costs.
For example, if you’re preapproved for $200,000 on top of your down payment, and the home will cost you $190,000, you have $10,000 left that you can use to cover seller concessions. However, if the home will cost you $199,000, that would only leave you with $1,000.
If your preapproval is enough to cover the purchase price of the home as well as closing costs, seller concessions are a great way to free up your cash flow.
3. The Home is Reasonably Priced and Interest Rates are Low
Seller concessions only really make sense when a home is reasonably priced. Not only do they affect the amount of your loan, down payment, and interest charges, they can also influence the home’s value, potentially increasing property taxes as well.
And, the more expensive the home, the higher closing costs will be.
If a home is already reasonably priced based on market value and current trends, asking a seller to cover some of your closing costs could be worth it for the cash it would free up today. But if a home is overpriced, or if interest rates are high, you may do more damage to your finances than good.
For example, rolling closing costs into your purchase price will make the home’s final selling price even higher, which can affect the property’s assessed value and how much you pay in property taxes, in addition to the extra interest charges.
If you’re unable to pay your closing costs, and you can’t get a seller to cover them for you, your last option is to ask your mortgage lender to cover them in your loan. However, this only applies to certain loan types, such as FHA loans and VA loans. It typically can’t be used for conventional loans.
Otherwise, you’ll need to cover closing costs yourself, which impacts whether you’re ready to buy a home. Plan for closing costs before you begin the home buying process so that you aren’t taken by surprise after you make an offer.