Buying a home involves more than the purchase price; closing costs can add thousands to your upfront expenses. These fees cover services like appraisals, title searches, and loan processing. However, buyers may negotiate for seller-paid closing costs, also called seller concessions, where the seller agrees to pay a portion of these fees to ease the buyer’s financial burden.
Seller-paid closing costs must be disclosed clearly in the purchase agreement and reflected in the mortgage documents. The lender reviews this arrangement to ensure it meets specific rules before approving it. The key documents showing this include:
- Loan Estimate: Provided soon after mortgage application, showing an estimated seller credit.
- Closing Disclosure: Your final closing document, given at least three days before closing, detailing the exact seller contributions, typically found on Page 3 under “Seller Credits.”
How Seller Concessions Work
During offer negotiations, buyers can request the seller pay part of the closing costs. For instance, if a home costs $350,000 and estimated closing costs are $7,000, a buyer might offer $350,000 but ask the seller to cover $5,000 of closing fees. This agreement becomes part of the contract and is subject to lender approval.
Limits on Seller Contributions
Lenders impose limits on seller concessions, usually as a percentage of the purchase price or appraised value, whichever is less, to prevent inflated home prices. Common limits include:
| Loan Type | Down Payment | Max Seller Contribution |
|---|---|---|
| Conventional Loan | < 10% | 3% of purchase price |
| Conventional Loan | 10%-25% | 6% of purchase price |
| Conventional Loan | > 25% | 9% of purchase price |
| FHA Loan | Any | 6% of purchase price |
| VA Loan | Any | 4% of purchase price* |
| USDA Loan | Any | 6% of purchase price |
*VA loans have specific rules; some closing costs may be paid beyond the 4% limit. Check with your VA lender for details.
(Sources: Consumer Financial Protection Bureau, NerdWallet)
Benefits for Buyers and Sellers
- Buyers: Reduce out-of-pocket cash needed to close. Helpful if you have down payment saved but limited funds for closing fees.
- Sellers: In a competitive market, offering to pay some closing costs can attract buyers and help sell the home faster at or near the asking price. The concession lowers the seller’s net proceeds but can facilitate the sale.
Common Mistakes to Avoid
- Oral Agreements Are Not Enough: All seller contributions must be written in the purchase contract.
- Know Your Loan Program Limits: Exceeding allowable seller concessions can delay or jeopardize your loan approval.
- Seller Concessions Are Not “Free”: Often the home price reflects this arrangement; it’s a negotiation tool, not free money.
FAQs
Where are seller-paid costs listed on the Closing Disclosure?
Seller contributions appear on Page 3 of the Closing Disclosure under “Seller Credits” in the “Buyer’s Transaction” section.
Can seller concessions be used for my down payment?
No. Concessions only cover closing costs, prepaid items, or discount points. Down payment funds must come from the buyer.
What if the seller’s contribution exceeds my actual closing costs?
Any excess funds return to the seller. Buyers do not receive cash back from unused seller credits.
For further details, see FinHelp’s Closing Disclosure and Maximum Allowable Closing Costs articles.