Seller credits are used by home sellers to attract buyers with an offer that helps buyers reduce their out-of-pocket costs at closing. Buyers may include seller credits in their offer to purchase a home in order to reduce their cash outlay at closing, and may also combine a request for seller credit with an increase in the purchase price offer. Used in this way, seller credits allow a home buyer to finance closing costs with their home loan.
To settle a real estate transaction, the seller and the buyer each have items due upon closing, which include escrow fees, property taxes, title insurance and other items. A seller can offer credits to help cover those fees. Markets vary, but lenders usually cap the amount of fees a seller credit can cover. The cap ranges from 3 to 9 percent of the home loan. A seller credit is paid to the buyer as a lump sum a closing from the sellers proceeds.
“As a listing agent, we don’t typically offer credits to the buyer on the front end,” says Becky Brown, Broker/Realtor, “unless 1), we know that there are some issues that need to be addressed, or 2), the house has been on the market for some time and offering something as a buyer incentive gets people through the door.”
Becky notes that she has been seeing a lot of “use as you choose” offers in MLS lately. That is a seller incentive that is offered if there are known cosmetic issues, like paint or flooring that need to be replaced.
When do seller credits come into play?
Buyers and sellers negotiate seller credits at the start of a transaction, usually with the buyers requesting an amount – as a dollar figure or a percentage – in their offer to purchase a property. Sellers can agree to the credit, reject it outright, or negotiate the amount of the the proposed seller credit.
“I always think of the seller credits as more tangible to the buyer,” says Tara Jones, Vice President of Mortgage Lending, with Guaranteed Rate. “Both a reduction of price OR a seller credit accomplishes the same thing for the seller- they ultimately net less.”
For a buyer, Tara explains that a reduction in price alone or lesser asking price only reduces the payment or down payment minimally in most cases. A seller credit for closing costs actually reduces the actual monies due so the buyer has more of their own funds left over while the seller still nets the same amount.
“This can mean more funds for moving, furnishing a new home, or appliances,” she says. “It’s a win for both sides as long as the net price is mutually agreed upon.”
A Realtor can advise on any limitations as to what a seller credit may apply, which should be verified with the home buyers’ lender. The seller may be permitted to pay any variety of items, from closing costs to repainting:
- Escrow fees
- Title fees
- Messenger expenses
- Recording and notary fees
- Homeowner’s association dues
- Club memberships
Know your non-allowable fees
The lender must approve the credit and the home’s value must merit the increase in sale price as determined by an appraisal. It’s integral to know the lender guidelines and local regulations.
“Currently, a seller can contribute 3% of the purchase price on a conventional loan, 6% on a FHA, and 4% on a VA loan,” notes Tara. “The seller credit cannot exceed the actual closing costs owed by the borrower. The buyer is still responsible for their down payment funds and minimum contributions set forth by each loan program.”
Closing costs win the popularity contest
When buyers ask for credits with their offer, it is important to know that it comes out of the sellers’ proceeds at closing.
“A lot of sellers are uneasy considering incentives proposed by a buyer,” explains Becky. “They are afraid that it comes out of their pockets upfront. I explain that it comes from their proceeds at closing. Most times we try to “build” seller credits into the purchase price.”
Closing costs are more common than most consumers realize, she adds.