Understanding Seller Concessions and USDA Home Loans

Can the seller pay all my closing costs?

New home buyersSeller concessions on a USDA home loan to pay closing and prepaid costs can often be worthwhile for potential buyers. They can reduce the amount of cash needed up front and by reducing the total cost to purchase a home, they may be able to close on a home sooner.

The USDA loan program allows for seller concessions as a way to help offset a buyer's closing costs. While there are limits to how much a seller can contribute, this can be a helpful tool for buyers who might otherwise struggle to come up with the necessary funds.

A seller concession may be used for a variety of purposes, including paying for the buyer's loan origination fees, discount points, appraisal fee, title insurance, and other closing costs. In some cases, the seller may agree to pay for repairs that are needed in order to meet the USDA's minimum property requirements.

While seller concessions may be helpful in reducing the amount of money that a buyer needs to bring to closing, it is important to keep in mind that they will increase the sale price of the home.

What Are the Seller Concession Limits?

A seller concession is a way for the buyer and the seller to work together to come to an agreement on a home purchase. Seller concessions are often offered by the seller in order to get the home sold quickly and at a reduced price.

Seller concessions are used to lower the home buyer's closing and prepaid expenses at settlement.

Seller concessions can be a percentage of the sales price or the seller may pay a certain monetary amount to the buyer's closing fees.

Closing costs, typically about 3-6% of the purchase price, are incurred by the buyer in a real estate transaction. 

The USDA allows seller to pay up to 6% of thesales price toward the buyer's closong and prepaid expenses.

What Closing Costs Do Seller Concessions Cover?

Closing costs graphicHere are some of the most common closing costs:

Appraisal

There are two purposes for the appraisal. The appraiser's first responsibility is to determine the home's worth because it is the loan's collateral. In addition, the appraiser evaluates the home's overall condition. Although an appraiser is not a home inspector, he or she can examine the property's overall condition and recommend that any issues are addressed further by a professional. Sparking wires or major water leaks, for example, will prompt an investigation.

Closing Attorney/Title Insurance Agent

Someone has to tell you and the seller where to sign and explain the mountain of papers that a mortgage requires. In some U.S. states, only a licensed attorney is allowed to supervise the property transfer. In other states, a title insurance agent is allowed to manage the settlement.

Credit Report

The lender will obtain a credit report from each of the three major credit bureaus. Each credit company's information will be combined into a single unified credit report. The lender gets the most detailed information and credit score from the tri-merged report.

Flood Insurance Report

The lender will check to see if the property is in a flood zone. The need for flood certification is self-evident. If the home was severely destroyed in a flood, the borrowers are unlikely to continue making payments on the mortgage. The lender will want flood insurance to protect their investment if the property is located in a flood-prone area.

Lender Fees

For the origination and processing of the loan application, lenders will charge the buyer fees. Lender costs are referred to as origination or discount points. Lenders frequently use mortgage discount points to lower interest rates.

Title Search

You and the lender need to be certain that all real estate taxes have been paid in full and that the property title is free and clear of liens or encumbrances. The title search investigates the ownership chain.

Title Insurance – The cost varies by state

Title insurance policyRecording Fees – the deed, note, and mortgage (also known as a deed of trust)

Following the signing of all documents and handshakes all around, the deed, mortgage, and promissory note will be "registered" or recorded at the county recorder's office. The county recorder maintains records of all transactions and makes the documents accessible to the public.

Transfer Tax (deed stamps/excise tax/recordation fees)

There is a transfer tax in the majority of states and counties. Consider the tax to be a real estate-specific sales tax. Although transfer taxes are referred to by a variety of names, they all produce income for the government. Additionally, the borrower may be assessed recordation fees. The loan amount is used to determine the recordation cost.

Additional services that may be necessary or requested include the following:

Home inspection: Home inspections are not required by the USDA or lenders.

Home warranty: Home warranties are not required by the lender.

Termite Inspection

You may be surprised to learn that the USDA does not require termite/pest inspections unless the appraiser, lender, inspector, or state law requires the property is clear of an active infestation. It should be noted that any previous (or current) damage from wood boring insects requires repair.

Survey Requirement

The USDA does not require a property survey, however, the title insurance, lender or settlement company may require a property survey to establish the exact property boundaries.

Prepaid Expenses: Real estate taxes and homeowner's insurance escrow

The lender, with the help of the settlement company, will determine how many tax and insurance dollars need to be set aside in an escrow account. The term escrow is another name for a savings account. For example, let's say you close on November 1st and the real estate tax bill is due February 1st of the following year. Because the tax payment date is so close to the settlement date, the lender will require that the escrow company withhold enough money to make the upcoming real estate tax payment.

Seller concessions can help you reduce the amount of money needed to buy a home.

Who Benefits From Seller Concessions

Sellers often agree to concessions, such as paying for part or all of the closing costs, to make their homes more attractive to buyers. 

The USDA allows sellers to contribute up to 6% of the purchase price towards closing and prepaid costs. This can be big savings for buyers, especially if they are not able to pay the settlement expenses. Some savvy home buyers will make a full-price offer in exchange for the maximum concession.

Advantages Of Seller Concessions

1. Seller concessions are a great way to reduce the amount of money you need to bring to the closing table when purchasing a home. 

2. In most cases, the seller will pay your closing costs and this can save you a significant amount of money. 

3. Additionally, if you are using a USDA loan, the seller may be willing to contribute up to 6% of the purchase price towards your closing costs. 

4. This can really help reduce your overall expenses and make purchasing a home more affordable. 

5. Always ask the seller if they are willing to provide any concessions and be prepared to negotiate on the price of the home. 

6. If you are able to get the seller to pay some or all of your closing costs, it can make buying a home much easier and less expensive in the long run.

Disadvantages Of Seller Concessions

When buying a home, the closing costs and purchase price are two important factors to consider. For buyers using a USDA home loan, the seller may be willing to pay some of the closing costs or reduce the purchase price. However, there are also some disadvantages to consider before asking for a concession.

The biggest disadvantage is that the seller is giving up money they could have kept. In most cases, the reduction in the purchase price is less than the number of closing costs the seller would pay. So, if you're able to pay your closing costs yourself, it's usually better not to ask for a concession.

Requesting seller concessions might make you a less desirable buyer. Especially in a seller's market, the majority of sellers are searching for bids with few conditions.

If there are numerous bids on a house, the seller will likely reject concession demands. In this situation, it may be best to submit a lower offer and pay the closing fees yourself. This option is more convenient for the seller and may enhance the likelihood of your offer being accepted.

How To Negotiate Seller Concessions

If you're thinking of buying a home and are looking for ways to save money, one way to do that is to negotiate concessions from the seller. Here are some tips on how to do just that:

When buying a home, many buyers seek out USDA loans because of the low-interest rates and relaxed credit requirements. However, buyers should be aware that the seller is not required to pay any of the closing costs associated with the loan. This means that buyers will need to come up with the money for things like origination fees, title insurance, and appraisal costs. 

One way to offset these costs is to negotiate a concession from the seller. This could be a reduction in the purchase price or an agreement for the seller to pay some or all of the closing costs. It's important to remember that concessions are negotiable and there is no set amount that the seller must contribute. 

If you're considering a USDA loan, it's important to start negotiating with the seller early in the process.

Be clear about your expectations. When presenting your proposals, be laser-focused on what you want and why it's important to you. Don't waver or back down once your seller starts getting defensive; keep your composure and continue talking until you've achieved what you set out to do.

Rotating question markFAQs About USDA Seller Concessions


Are There Limits on Seller Concessions?

When buying a home with a USDA loan, the seller may pay a maximum of 6% of the purchase price in closing costs and/or prepaid expenses. The seller is allowed by the USDA guidelines to pay a flat dollar amount for the benefit of the buyer. Using a specified dollar concession keeps the transaction tidy for buyer and seller.

If the purchase price is $100,000, for example, the seller could contribute up to $6,000 in concessions. This could include paying for part or all of the buyer's closing costs, as well as prepaid expenses like homeowners insurance and property taxes. 

It's important to note that the seller can only pay for items that are considered customary and reasonable closing costs. Any unusual or custom fees will need to be paid by the buyer.

Are seller concessions common?

Seller concessions are common when a home is purchased through the USDA.

Are seller concessions paid out of pocket?

No, seller concessions are not paid out of pocket. The seller concession is a credit that is applied to the buyer's closing costs on the settlement statement. The cost is subtracted from the seller's sales price.

Are seller concessions taxable?

Generally speaking, seller concessions on a USDA home loan are not taxable. However, there may be exceptions if the concessions are considered income by the IRS. If you're uncertain whether a particular concession is taxable, you can consult with your tax advisor or look into any applicable tax laws.

Can sellers refuse to contribute toward my closing costs?

Yes, the seller can refuse to contribute to your closing costs. However, if they do so, they may be less likely to find a buyer. Most buyers expect the seller to contribute toward closing costs, and many buyers will not even consider a property that does not include this incentive.

What other types of loans permit seller concessions?

There are several types of loans available to potential home buyers. The FHA loan, VA loan, and conventional loan are all popular choices. Each loan type has its own benefits and drawbacks, so it is important to research each one before deciding which is right for you. The FHA loan is backed by the government, so it has certain rules and regulations that must be followed. The VA loan is available only to veterans and their families, and the conventional loan is a more traditional type of mortgage.

Read more about USDA loans with our questions and answers page

Conclusion

Seller concessions are an important part of the home loan process for buyers and sellers alike. They can make a big difference in terms of whether you're able to purchase or sell your home, so it's important to be aware of what they are and how they work.

In this article, we'll take a look at some common seller concessions and explain which ones might apply to you. We hope that this information will help you understand seller concessions and put them into perspective so that you can get the most out of your home buying experience.

SOURCE: Chapter 6: Loan Purposes - USDA Rural Development

Recommended Reading

  1. How a USDA Loan Can Help You Buy a Home
  2. See Today's Mortgage Interest Rates for a USDA Home Loan
  3. Answers to Common Questions About USDA Loans.