Question from a buyer - seller concessions

What are they?  Why would I want them?

I had a buyer today asking me about adding seller concessions into his purchase offer so I thought I'd run through an explanation of what they are.  

When you buy a house, you need "cash to close".  

Cash to close is a term that includes 1) the down payment on the house - this will be your equity in the house to start.  So if the house costs $200,000 and you have a 5% down payment = $10,000, this means you have $10,000 in equity and owe $190,000 on your mortgage.  

Cash to close also includes 2) additional costs - money that you pay the lender for the mortgage.  It includes fees (which banks are famous for), the appraisal, sometimes mortgage points, attorney fees for the bank, title insurance to cover the bank etc.  

The buyer who was asking me about seller concessions today had been quoted an additional $6,600 in closing costs he would have to come up with (above and beyond his down payment).  He doesn't have that much.  So now what do we do?

One solution is to finance the $6,600 closing costs by adding it to the mortgage.  This can be an inexpensive way to finance that money because, as we all know, interest rates are super low right now!

The way this works is like this:  We take the purchase price of the house, let's use the $200,000 example again.  Your contract looked something like this without seller concessions:

purchase price of house       $200,000   the amount the seller has agreed to sell the house for

down payment                       $  10,000    this is your 5% down payment (in this example)

due at closing                        $190,000    this is the amount the bank is loaning you for the house

but... you also need $6,600 in closing costs....


With seller concessions of $6,600, you are borrowing the money for closing costs.

Your contract will look a little more like this now:

purchase price of house        $206,600   the seller's $200,000 plus $6,600 closing costs

down payment                        $  10,000   your 5% down payment (in this example)

due at closing                         $196,600   the amount the bank is loaning you for the house AND your closing costs.  Of this $196,600, the seller gets $190,000 same as above, and you get $6,600 back - which is why a seller concession is also sometimes called a "seller give-back".

Of course, you then immediately turn around and use that $6,600 to pay the bank the fees you incurred for the mortgage so you don't get to enjoy it, but you DO get to enjoy your new home!!

Hope that makes understanding SELLER CONCESSIONS a little easier and as always, if you have any other questions I can answer, please let me know!!