Glossary
A seller credit is a type of concession that a seller shares with a homebuyer to offset some of the real estate expenses at closing. Taking advantage of a seller credit at closing can be a way for buyers to save on out-of-pocket expenses without negotiating a decrease in a home’s listing price.
Seller credits typically favor buyers, and so are more common in a buyer’s housing market where sellers may need to provide additional incentives to facilitate a home sale. But seller credits can be mutually beneficial for both parties in a real estate transaction. Let’s examine some of the circumstances in which sellers would apply a seller credit to buyer costs.
Seller credits can be used for a range of real estate costs, though the conditions of the buyer’s home loan may disqualify some applications. Here are the most common expenses that seller credits can offset.
It’s not uncommon to uncover significant structural or equipment problems during a home inspection. If the issues are severe enough, they can potentially scare away an otherwise interested buyer. Sellers have a couple options in this scenario. One would be to drop the listing price to compensate for the expected home repair costs. Another would be to personally attend to the repairs and then relist the property. A third option would be to provide a credit to the buyer. Here, the real estate transaction would move forward, but the seller essentially gives the buyer money to pay for repairs after the buyer has moved in.
Maintaining financial reserves for closing costs should be on every homebuyer’s real estate checklist, but it’s nevertheless common for buyers to find themselves out of budget or strapped for cash at closing. If sellers are motivated to see the deal through, they can provide credits to assist buyers with closing costs. Depending upon on the nature of the transaction and associated loan, seller credits can be applied to one or more of the following costs:
In some cases, seller credits could apply to mortgage points to decrease the buyer’s interest rate, thereby reducing monthly payments. This sort of arrangement might be more common in high interest rate environments where buyers might be a little skittish.
Seller credits are typically used to cover either various closing costs or necessary repairs to the home or surrounding property. In some circumstances, credits may also apply toward the buyer’s escrow account, mortgage points, warranty, or even outstanding debt.
There is also the possibility of leveraging seller credits to fold closing costs into the buyer’s home loan. This scenario involves raising the property’s sale price by a predetermined amount, then providing the buyer with an equivalent credit. The buyer’s mortgage has increased, but the credits mean there is cash on hand to cover immediate closing costs. This, of course, presumes that the home’s higher appraisal value is approved by the buyer’s lender. If all goes according to plan, this strategy is mutually advantageous. Because the increased sale price compensates for the out-of-pocket credit, the seller walks away with the same amount of money. The buyer, on the other hand, gets a little more financial flexibility and can move ahead with a real estate purchase that may have otherwise been out of reach.
For homebuyers, seller credits can lead to advantageous savings. Depending on the agreement between interested parties, buyer advantages could include:
But the advantages of seller credits aren’t necessarily one sided. While the buyer’s savings do often come at the expense of the seller, there are scenarios, like the one outlined in the previous section, in which the seller recoups the expense of a credit by agreeing to a higher property sale price.
Even if providing credits ultimately results in the seller walking away with less money, there are other seller advantages to speak of. If it’s not an ideal time to sell, seller credits can attract buyers, incentivize swift closings, and compensate for flaws with the home that could impede a sale. Ultimately, offering seller credits is a negotiation tactic that is important to remember.
Seller credits have their place in real estate, but there are lender regulations in place to prevent their misuse. Seller credit limits vary by lender. Federal Housing Authority (FHA) and United States Department of Agriculture (USDA) loans allow for sellers to contribute up to 6% of a home’s sale price. Seller’s are typically disallowed from directly contributing to a buyer’s down payment. The United States Department of Veterans Affairs (VA) caps seller contributions at 4%.
Some organizations adjust their limits on seller contributions depending on the amount of the buyer’s down payment. Fannie Mae, for instance, caps seller contributions at 3% of a home’s sale price if the buyer puts down 10% or less. This limit increases to 6% when a buyer puts down 10% to 25%, and 9% when a buyer puts down more than a quarter of the home’s value.
A number of factors can also affect lender limits on seller credits. For instance, loans for investment properties (as opposed to primary or secondary residences) could have stricter limits. If you think a seller contribution is worth pursuing in your situation, you should discuss the possibilities with your lender and real estate agent.
Remember that seller credits are just one tool of many to attract buyers and negotiate a favorable outcome in a real estate transaction. Sellers can also support buyers by offering home warranty coverage. If something in the home malfunctions after closing, buyers—and sellers, for that matter—may be protected from the cost of repairing the appliance or system. Learn more about Liberty Home Guard home warranty offerings by calling (833)-543-9700.