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Understanding Seller Concessions for USDA Loans

By Neighbors Bank Team February 1, 2024

Understanding all aspects of the USDA homebuying process can be a bit daunting, especially when it comes to making significant financial decisions. One aspect that tends to confuse many buyers is seller concessions.

When purchasing a home with a USDA loan, the upfront costs can be a major financial hurdle for many buyers, but seller concessions can be an effective strategy to ease the burden of closing costs.

What are seller concessions?

Seller concessions are negotiations or agreements where the seller agrees to pay a portion of the buyer's closing costs

Closing costs generally range from 3-6 percent of the home’s purchase price and vary depending on a variety of factors, including the borrower’s financial situation, the mortgage lender and the specifics of the property being purchased. Common USDA closing costs can be divided into two categories: loan-related costs, such as origination or processing fees, and property-related costs, such as home insurance premiums or prepaid property taxes.

Maximum Seller Concessions By Loan Type

When compared to other types of loans, USDA loans offer an attractive maximum seller concessions limit. 

To put this into perspective, check out the chart below to compare maximum seller concessions for conventional, USDA, FHA and VA loans:

Loan Type Maximum Seller Concessions
Conventional 9%*
FHA 6%
VA 4%

*Note: The maximum seller concessions for conventional loans depends on the size of the buyer's down payment.

USDA Loan Seller Concessions: Pros and Cons

Still not sure how to feel about seller concessions for your USDA home loan? See the chart below for a quick overview of the pros and cons:

Pros Cons
Reduce closing costs Less appealing to sellers
Make homebuying more affordable Potential increase in total loan amount
Use extra funds for other needs Requires negotiation with seller

Benefits of Seller Concessions for USDA Loans

1. Reduce Closing Costs

One of the primary benefits of seller concessions for USDA loans is the ability to reduce the financial burden of closing costs on your new home. Closing costs can accumulate to a significant amount. Being able to negotiate with the seller to cover a portion of these expenses can make a substantial difference in your overall financial situation.

2. Make Homebuying More Affordable

The maximum limit of 6% seller concessions for USDA loans makes this type of mortgage one of the most buyer-friendly options available. While conventional loans can technically offer seller concessions of up to 9%, these borrowers must contribute a down payment of over 25% of the loan amount to qualify for this maximum concessions limit.

With USDA loans, buyers can take advantage of seller concessions without the need for a down payment at all, making homeownership attainable for a wider variety of borrowers, from low-income families to first-time homebuyers.

3. Use Extra Funds for Other Needs

Seller concessions offer a unique advantage to homebuyers by allowing buyers to reallocate funds originally reserved for closing costs. By taking advantage of these concessions, buyers have the flexibility to prioritize other relevant financial responsibilities as they choose. This may include increasing savings for future expenses, paying off existing debts, making home improvements or managing other personal expenses.

Drawbacks of Seller Concessions for USDA Loans

1. Less Appealing to Sellers

While seller concessions are beneficial to buyers, they may be seen as less appealing from the seller's perspective. When multiple offers are on the table, sellers often weigh various factors, including the net proceeds they will receive after covering concessions. As a result, buyers who ask for significant concessions may face more challenges in convincing sellers to accept their offer, particularly in competitive real estate markets.

2. Potential Increase in Loan Amount

Some buyers may opt to make a slightly higher offer on a home to remain competitive when asking for seller concessions. This option can make the upfront costs more manageable while still maintaining an attractive offer, but it's important to consider the long-term implications of this strategy. Increasing your total loan amount means you will accumulate more interest over the life of your loan, potentially resulting in greater overall expenses.

For example, suppose you're considering a property worth $250,000, and your closing costs are estimated at $7,500. You might choose to increase your total offer to $257,500 but ask for seller concessions. While this method allows you to preserve your immediate cash flow and remain competitive from the seller’s perspective, you will accrue more interest over time since you are taking out a larger USDA loan.

3. Requires Negotiation with Seller

Negotiating seller concessions requires effective communication and compromise between the buyer and the seller. It may not always be a straightforward process, as both parties are seeking to maximize their own benefits. Buyers need to approach the negotiation tactfully, understanding the seller's motivations and being prepared to make a compelling case for why the concessions are reasonable and mutually beneficial for both parties.

How to Negotiate Seller Concessions

Negotiating seller concessions can be a strategic process that requires careful planning and efficient communication between the buyer and seller.

Here are some useful tips to help you effectively negotiate seller concessions:

Know your budget: Determine the maximum amount you can comfortably afford for your overall loan amount. This knowledge will give you a solid foundation for negotiating seller concessions without overstretching your finances.

Get pre-approved for your USDA loan: Receiving a USDA loan preapproval will not only help you determine your price range for prospective properties but also shows sellers that you are a serious and qualified buyer. This can give you an advantage in negotiations and demonstrate your financial readiness to proceed with your home purchase.

Understand the seller’s perspective: Put yourself in the seller's shoes and consider their motivations. Are they looking to sell quickly, or do they have time to wait for a better offer? Understanding the seller's situation can give you valuable insights to tailor your negotiation approach. In some cases, offering a slightly higher purchase price with seller concessions might be more appealing than a lower offer without concessions.

Consider the current housing market: Having a thorough understanding of the current housing market can significantly influence your approach to negotiating seller concessions. In a buyer's market where there is more inventory than demand, sellers may be more open to offering concessions to attract buyers. In a seller’s market where there is high demand but limited inventory, sellers may be less inclined to offer concessions as they are more likely to receive multiple competitive offers on their listing.

Work with an experienced real estate agent: A seasoned real estate agent who is familiar with USDA loans and negotiations can be a valuable asset in the homebuying process. These agents can help you navigate seller concessions and guide you through the negotiation process while ensuring that your offer remains competitive and maximizes your benefits.

Written by:
Neighbors Bank Team
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