By Taylor Crawford · Closing Costs
Yes, a seller can often help pay a buyer's closing costs. These are commonly called seller concessions or seller contributions.
But there are limits, the contribution has to be negotiated as part of the purchase contract, and exactly how much a seller can contribute depends on factors such as the loan program and transaction. For buyers who are trying to preserve some of their savings, seller concessions can make a significant difference in the amount of cash needed to purchase a home.
Here's how they work.
What Are Seller Concessions?
When you buy a home, your down payment isn't the only money you may need at closing.
There can also be costs associated with the mortgage and transaction, along with prepaid expenses such as homeowners insurance, property taxes and interest.
How Much Money Do You Really Need to Buy a Home in the Birmingham Area?
A seller concession is when the seller agrees to pay certain eligible costs on the buyer's behalf. For example, imagine you're buying a $350,000 home and negotiate for the seller to contribute $7,000 toward eligible closing costs.
Instead of you paying those $7,000 of costs from your own funds, the seller's contribution could cover them, assuming the costs are eligible and the contribution falls within the applicable loan guidelines.
That could allow you to keep $7,000 in savings after purchasing the home.
Can the Seller Pay Your Down Payment?
Generally, seller concessions aren't simply a substitute for the buyer's required down payment.
Your down payment and your closing costs are two different things.
Seller contributions are typically used toward eligible closing costs, prepaid expenses and other allowable items rather than satisfying a borrower's required minimum investment.
That's an important distinction. If you need $15,000 for your down payment and have another $8,000 in eligible closing costs and prepaid expenses, negotiating an $8,000 seller contribution doesn't necessarily eliminate your down payment.
It can, however, substantially reduce your total cash needed to close.
How Much Can a Seller Pay?
This is where I don't like giving buyers one universal percentage.
Different mortgage programs have different seller-contribution rules, and the allowable amount can also depend on the specifics of the transaction.
Conventional, FHA, VA and USDA loans don't all operate under identical rules.
So rather than starting negotiations with:
"What's the maximum the seller is allowed to pay?"
I'd rather determine:
How much help does this particular buyer actually need? Then the buyer's lender and real estate agent can work together to structure the offer appropriately.
Why Would a Seller Agree to Pay a Buyer's Closing Costs?
Because everything in a real estate offer is part of a negotiation.
A seller isn't necessarily giving money away for no reason.
Suppose a home is listed for $400,000.
One buyer offers $390,000 with no seller concessions.
Another offers $400,000 but requests $8,000 toward eligible closing costs.
Those offers have different economics for the seller, and there may be other differences in their terms as well. The seller and listing agent can evaluate the entire offer—not just whether the buyer asked for closing-cost assistance.
Market conditions matter too.
A seller with multiple strong offers may be less interested in providing concessions. A seller whose home has been sitting on the market may be more willing to negotiate.
Why Not Just Offer Less for the House?
This is one of my favorite things to explain to buyers.
Cash today and money financed over the life of a mortgage are not necessarily worth the same thing to you.
Imagine a seller is willing to negotiate $5,000.
You might have the option to negotiate a lower purchase price.
Or you might negotiate for the seller to contribute that money toward eligible closing costs. Reducing a mortgage by $5,000 may only change the monthly principal-and-interest payment by a relatively small amount.
But receiving $5,000 toward closing costs could allow you to keep $5,000 in your bank account immediately.
For a buyer who would otherwise drain most of their savings to purchase the home, preserving that cash can be valuable.
That doesn't mean seller concessions are always better than negotiating a lower price. It means we should run the numbers instead of assuming one is better.
Can Seller Concessions Be Used to Buy Down the Interest Rate?
In many situations, allowable seller contributions can be used toward eligible costs associated with reducing the buyer's interest rate.
That could mean paying discount points for a permanent rate reduction or, when the loan program and transaction allow it, funding a temporary buydown.
Whether that makes financial sense is another question.
Sometimes I'd rather see a buyer use a seller contribution toward their ordinary closing costs. Sometimes using some of it toward the interest rate may produce more value.
Again, this is where actually comparing the numbers matters.
What Happens If the Seller Gives You More Than Your Closing Costs?
You generally can't just receive unused seller-concession money as cash after closing.
The contribution is limited to eligible costs and applicable loan guidelines.
That's why the lender and real estate agent should communicate before the contract is finalized whenever possible. If we estimate that a buyer has $6,000 of eligible costs, requesting a $15,000 seller contribution without a plan for how it can legally be used may not accomplish what the buyer expects.
The goal isn't to negotiate the biggest concession possible.
It's to negotiate a concession we can actually use.
Are Seller Concessions Only for First-Time Homebuyers?
No.
Seller concessions aren't a first-time-homebuyer benefit.
Repeat buyers can negotiate seller contributions too, subject to the applicable mortgage guidelines and terms of the transaction.
They're simply another part of structuring a real estate transaction.
Do Seller Concessions Make Your Offer Weaker?
They can affect how a seller evaluates your offer, but asking for concessions doesn't automatically make it a bad offer.
The seller is looking at the entire transaction.
Purchase price matters.
Net proceeds matter.
Financing matters.
Contingencies matter.
Closing timeline matters.
And in a competitive situation, the strength of the other offers matters.
This is why your lender and real estate agent should be working together. The question isn't simply:
"Can we ask the seller for closing costs?"
It's:
"How do we structure an offer that accomplishes what the buyer needs while still making sense to the seller?"
Frequently Asked Questions About Seller-Paid Closing Costs
Can a seller pay all of my closing costs?
Potentially, but it depends on the amount of your eligible costs, the mortgage program's rules and the transaction. Seller contributions are subject to limits and can't simply be converted into cash for the buyer.
Can a seller pay my down payment?
Seller concessions generally aren't used to replace a borrower's required minimum down payment. Down payment and closing costs should be thought of separately.
Can I ask for seller concessions with an FHA loan?
FHA transactions can allow seller contributions subject to FHA requirements and the specifics of the transaction.
[INTERNAL LINK → 3 FHA Loan Myths Alabama Homebuyers Should Stop Believing]
Can I ask for closing costs with a conventional loan?
Conventional financing can also allow seller contributions. The applicable limits depend on the details of the loan and transaction.
Is it better to ask for closing costs or offer a lower price?
It depends on what you're trying to accomplish. A lower price may reduce your loan amount and payment, while a seller contribution may allow you to keep more cash in your bank account after closing. Ask your lender to show you both scenarios.
The Bottom Line
Yes, sellers can often help buyers with closing costs.
But seller concessions aren't free money, they aren't unlimited, and they need to be structured correctly.
For some buyers, negotiating seller-paid closing costs can be one of the most effective ways to reduce the amount of cash required to purchase a home.
For others, negotiating price or using the seller's contribution another way may make more sense.
That's why I like to run the numbers before the offer is written. If you're buying a home in Alabama and want to know what a seller contribution could actually do for you, I'm happy to run a few scenarios so you and your agent can see the options before deciding how to structure your offer.