You’re buying a home and negotiating with the seller when you ask for some concessions. The seller agrees to use some of their cash to sweeten the deal. Now, it’s up to you to decide which concessions will give you the most value.
Here’s what you need to know as you weigh your options.
The three ways to use seller concessions
When a seller is willing to work with you to make a home more affordable, there are three main ways they can help you out.
- First, they can give you a closing cost credit. This is up-front cash that covers some or all of your closing costs, reducing the amount you need to bring to the closing table. The credit might cover standard closing expenses, such as title insurance or appraisal fees, or it could go toward prepaying other costs at closing, like homeowners insurance premiums.
- Second, the seller can pay for either a temporary or a permanent rate buydown. To temporarily buy down the interest rate, the seller deposits money in an escrow account, and the funds are used to cover some of your interest during the buydown period of one to three years. A permanent rate buydown involves paying the lender discount points at closing in exchange for permanently lowering the interest rate you’re charged.
- Finally, the seller can give you a price reduction. Lowering the purchase price of the home reduces the amount you have to borrow and can slightly lower your down payment and monthly mortgage payment.
The math — what each option actually saves you
Let’s look at an example to see how these seller concessions compare. Suppose you’re buying a $400,000 house with a 5% down payment and using a 30-year conventional loan at a 7% interest rate. The following table shows the math, using calculations from RMC Home Mortgage.
| $10,000 closing cost credit | $10,000 toward permanent buydown | $10,000 toward 2-1 buydown | $10,000 price reduction | |
|---|---|---|---|---|
| Up-front cash saved | ~$10,000 | $0 | $0 | $500 |
| Monthly payment savings | $0 | ~$250/mo | ~$488+/mo (yr 1) | ~$60/mo |
| Long-term savings | None | Strong if staying 5+ years | Best if planning to refi | Modest |
| Best for | Cash-constrained buyers | Long-term owners | Expecting to refi or move in 2-5 years | Reducing loan size |
| Amount of $10,000 credit used | Up to $10,000* | $10,000 | ~$8,857 | $10,000 |
*A seller credit can’t exceed your actual closing costs. If yours come in at a lower number, you can’t pocket the difference.
A closing cost credit lowers your up-front costs, but it does not affect the monthly payment or result in any additional savings over time. A permanent buydown reduces the monthly payment and may be worthwhile if you’re going to keep the mortgage long-term. A 2-1 buydown reduces the monthly payment more significantly during the first year, but because the effect is short-lived, it’s best if you plan to move or refinance. And a price reduction results in small decreases in both the down payment and the monthly payment.
When to choose a closing cost credit
Consider asking for a closing cost credit when you’re having trouble coming up with enough cash to close. You can expect to pay 2% to 5% of the loan amount in closing costs, or $7,600 to $19,000 on a $380,000 loan. If you’re not able to raise those funds from friends or family, a seller concession could be a good alternative.
A closing cost credit can also be helpful if you have other up-front expenses related to your move. For example, maybe the home needs minor repairs or upgrades, and you want to take care of them yourself rather than wait for the seller to get them done. You could negotiate a closing cost credit, then use the money you would have spent on closing costs to pay for the work on the home.
When to choose a rate buydown
A rate buydown can be a worthwhile concession when interest rates are high.
If you’re planning to keep your mortgage for several years, you might want a permanent buydown. This lowers the rate you pay for the life of the loan, and, as a result, your monthly payment is permanently lower. The savings can add up significantly over time.
A temporary rate buydown can give you an even larger reduction in your monthly payment, but it’s only in effect for two or three years at most. Buyers might prefer this option if they’re confident they can refinance to a better rate at the end of the buydown period, or if they don’t plan to stay in the home very long.
“Maybe they’re moving to another state, or they know they’re going to be reassigned to another position within a short period of time. That [temporary] buydown then makes it very affordable,” said Chris Parks, Sales Manager at Churchill Mortgage.
When to choose a price reduction
A price reduction can make sense when you’re interested in reducing the total amount you borrow. Maybe you’re just at the threshold of needing a jumbo loan, and you’d prefer to borrow a little less and get a conventional loan. Or maybe you have nearly enough saved for a 20% down payment to avoid paying private mortgage insurance, and a price reduction would bump up your down payment to 20% of the new loan amount.
Parks typically sees price reductions appeal to buyers who want to pay off their debt as soon as possible.
“That type of buyer tends to be very, very aggressively wanting to eliminate debt, and so those people will take advantage of the early payoff calculators that I give them and other things like that because they really want to eliminate debt quickly,” Parks said.
Can you ask for more than one?
You can ask to combine seller concessions, with the caveat that the value of the concessions can’t be higher than the maximum for the type of loan you’re taking out. The maximum concessions are a percentage of the purchase price, or in some cases, the appraised value.
Concessions rarely divide evenly, which is part of why combining them is common. In the example above, a 2-1 buydown costs about $8,857 — so a $10,000 concession leaves roughly $1,100 that has to go somewhere. Buyers typically direct the remainder to closing costs or a small price reduction.
“If they’ve negotiated a very sweet deal as far as seller concessions, we try to do the permanent rate buydown as much as we can, and then with whatever’s left over, what we try to do is we try to reduce the price. That’s the most common way we see it,” Parks said.
Seller concessions limits
| Loan type | Max seller concessions |
|---|---|
| Conventional, primary/second home | 3% (LTV above 90%), 6% (75–90%), 9% (below 75%) |
| Conventional, investment property | 2% |
| FHA | 6% |
| VA | 4% (certain concessions) |
| USDA | 6% |
Which is right for you?
Ask yourself these questions to see which seller concessions you’re likely to benefit from.
Do you have enough cash for closing? If not, consider a closing cost credit.
Are you facing a high interest rate, and do you plan to keep your home loan long-term? A permanent rate buydown could lower your monthly payment and save you interest over the life of the loan.
Are you looking to lower your interest rate but expecting to refinance soon? A short-term rate buydown can give you larger savings on your payments over the next year or two.
Is your down payment smaller than you’d like? A price reduction can lower the size of your loan so that your down payment goes further, perhaps eliminating the need for PMI if your down payment was just under 20% of the original price.
Is the seller very motivated to negotiate? If you see a home that’s been on the market for 30 days or more, it could be in your interest to ask for a combination of concessions.
A permanent buydown lowers your interest rate for the entire 30-year life of the loan by paying discount points up front. A temporary buydown (such as a 2-1 buydown) uses seller funds placed in an escrow account to lower your interest rate for just the first 1 to 3 years. After the temporary period ends, your mortgage payment returns to the full fixed interest rate.
No. Seller closing cost credits cannot exceed your actual closing costs, and lenders do not allow you to pocket any unused concession as cash at closing. If your negotiated seller credit turns out to be higher than your actual costs, you must reallocate the remaining funds—such as applying them toward a rate buydown or a purchase price reduction.
Each loan type sets a maximum percentage of the purchase price (or appraised value) that the seller is allowed to contribute:
Conventional Loans: 3% max if your down payment is under 10% (LTV > 90%), 6% max for down payments between 10%–25%, and 9% max for down payments over 25%.
FHA & USDA Loans: Up to 6%.
VA Loans: Up to 4% for standard concessions.
Investment Properties: Strictly capped at 2%.
For a seller, the total out-of-pocket dollar amount is often the same, but a price reduction lowers their gross sale price on public records, which can slightly affect local comparable home sales (“comps”). However, sellers who want a straightforward transaction with fewer lender conditions or escrow accounts may prefer a simple price reduction.
Yes. As long as the total value does not exceed the maximum contribution cap for your loan type, you can stack concessions. In fact, combining them is very common because concessions rarely divide evenly. For instance, if you have a $10,000 credit and a 2-1 rate buydown costs ~$8,857, you can use the remaining ~$1,143 toward closing costs or a minor price reduction.
Manoj Sharma is a Senior Writer on the banking team at Tax Assistant. He provides information on budgeting, bank accounts, the banking industry, and other related topics. Using original data and methodologies, he helps you identify the best financial institutions, accounts, and products tailored to your needs. Manoj holds a degree in Journalism and Political Science from Syracuse University. All articles are strictly reviewed and fact-checked by our panel of expert Chartered Accountants, including CA Devendra Saini, CA Nikhil Khunteta, and CA Ankit Goyal
