How Concessions and Buydowns Can Help You Buy a Home
Seller concessions and mortgage buydowns can help lower your upfront or ongoing costs when you buy a home. Here's how they work.
Photo by Kindel Media on Pexels
Rising mortgage rates are making buying a home more costly. And if you're keeping an eye on home sales in your area, you might be disappointed to find that prices aren't necessarily dropping to make up the difference. However, there could be hidden savings in the form of seller concessions that you don't see in the online listing.
These concessions can help buyers save money, and they are increasingly common in some markets. According to a March 2023 report from Redfin, nearly half (45.5%) of sellers gave concessions during the three months ending February 28 — compared to 31.1% the prior year. However, you'll want to consider the different types of concessions that you could ask for and whether sellers tend to offer concessions where you're buying.
What are seller concessions?
Seller concessions, sometimes called seller contributions, are agreements between the home's seller and buyer. Depending on the specifics, the concessions might help you save money upfront, during the first few years in the home, or over the lifetime of your mortgage.
When you want to ask for a concession, it's important to consider the different options and how they could benefit you in the short and long term. Also, be aware that your lender might limit how much the seller can offer based on the type of mortgage you get and your down payment.
However, if the seller is motivated to close and you're within the limitations, there are three general kinds of concessions that you could try to get.
Closing and repair costs
Sellers might help you pay for some or all of your closing costs, which could include the costs for inspections, appraisals, credit checks, attorneys, title insurance and loan origination fees.
These types of seller concessions can't exceed your closing costs, and you won't actually save money overall because the seller increases the sale price to match. But the concessions can help you if you don't have enough cash for the closing costs and down payment.
Alternatively, a seller might offer to pay for specific repairs or maintenance, such as a new roof or water heater. These concessions might be negotiated after a home inspection reveals an issue that could otherwise lead a buyer to walk away, or if the home clearly needed repairs or upkeep work when it's listed.
As with closing cost concessions, these repair concessions won't necessarily put extra cash right into your pocket. Instead, the seller might cover some of your upfront repair costs without raising the sale price, or alternatively, lower the sale price to reflect the difference.
Sales concessions
You could also think outside the box and ask for sales concessions that aren't related to your upfront closing costs or repairs. These could include all sorts of arrangements, such as when the seller:
- Helps cover your moving costs.
- Gives you interior or exterior decorations.
- Cheaply sells you, or gives you, furniture or appliances.
These can help sweeten a deal, and there might be fewer rules or limitations. But don't push things too far or the seller might feel like you're trying to take advantage of them and move on.
Mortgage-rate buydowns
As interest rates rise, mortgage buydowns are also becoming an increasingly popular concession. These can help lower your interest rate and, as a result, your monthly payment.
You can permanently buy down your interest rate by buying points—sometimes called discount points or mortgage points. Each point generally costs about 1% of the mortgage amount and lowers your interest rate by .25%, and you can ask the seller to cover part or all of the cost.
You might decide to buy points even if the seller doesn't pay for them. However, you'll want to consider your plans for the home and where you think interest rates might go. For example, you might not want to buy points if you'll likely move in a few years or think interest rates will drop and you'll be able to refinance to a lower rate.
Temporary rate buydowns are also available, and there are three common arrangements:
- 1-0 buydown: Your mortgage rate would be 1% lower the first year.
- 2-1 buydown: Your mortgage rate would be 2% lower the first year and 1% lower the second.
- 3-2-1 buydown: Your mortgage rate would be 3% lower the first year, 2% lower the second and 1% lower the third.
Unlike with buying points, temporary buydowns generally cost about the same amount as the total interest savings — they don't offer net savings. Individual sellers, home builders and even some mortgage lenders offer buydowns to attract buyers and customers. Essentially, you're splitting the cost of your mortgage with the other party during the first one to three years.
Improving your FICO® Scores can also save you money
No matter where you're buying, your FICO® Scores will be important. At a minimum, you might need a FICO Score of 500 to 680 to qualify for various types of mortgages. However, a higher score can help you qualify for a lower interest rate that could save you tens or hundreds of thousands over the lifetime of your loan.
You can use the myFICO savings calculator to see estimated monthly mortgage payments and total interest payments based on the type of mortgage, state, loan amount and your FICO® Score. If you don't have an excellent score yet, learn how to improve your FICO Score before you buy a home.
Get your FICO® Score from FICO, for free. No credit card required.
Louis DeNicola is a finance writer based in Oakland, California. He specializes in consumer credit, personal finance, and small business finance, and loves helping people find ways to save money. In addition to FICO, Louis works with a variety of financial services firms, credit bureaus, and educational websites, including LendingTree, Credit Karma, and Experian.