Seller credits, often known as seller concessions, are often requested by a buyer to assist them in the purchase of a home. They are sometimes even offered from the seller to the buyer in order to facilitate the sale of a home. However, there are some myths and misunderstandings about seller credits that warrant explanation. Here we try to clear up those misunderstandings and review how the seller credits work for both the buyer and the seller.
Essentially, these credits (or concessions) are most often used to allow buyers to roll their closing costs into the total cost of the home, enabling them to purchase the home with less cash down at closing.
So, how does this impact the seller? Many sellers get “put out” when asked if they will allow a seller credit because they automatically assume they will make less money from the sale of the house. On the flip side of that, there are some sellers that believe they will walk away with more money in hand due to the seller credit. Neither of these are necessarily true, and here is why: the seller credits are added to the agreed upon purchase price of the home, however this credit is to cover the already estimated amount of the costs needed at closing. This is simply allowing the borrower to roll the closing costs into their loan, making their loan amount higher while the seller still walks away with the agreed upon price.
Seller credits are also requested when there are known repairs that need to be made to the home or if the home is outdated, requiring the buyer to put money into the home after they purchase it. In this case, the seller credit allows the buyer to keep more cash on hand to make these repairs and updates when otherwise they would have been too strapped for cash.
So how does this impact your mortgage lender and mortgage process?
Often times, mortgage lenders will make your loan approval contingent on the buyer receiving a seller credit. This happens when the buyer (often first-time home-buyers) have limited cash on hand, especially after taking into account the down-payment amount needed to cover the expected closing costs. It is also important to note that depending on the lender and what type of loan the buyer is applying for, there is a cap on the amount of credit that can be applied, which is usually between 3 percent and 6 percent. When reviewing the types of loans available to you, be sure to determine the cap amount you have to work with.
It is also important to understand that even if the seller agrees to the credit and the lender proceeds with the paperwork, the whole deal is contingent on the appraisal. If the seller was originally asking $200,000 and you determine you need $8,000 for closing costs, then your new loan amount is actually $208,000.000. In order for the scenario to work, the home must appraise for the $208,000.00 or the lender will have to deny the loan.
Seller credits are being used every day in the home buying process, and in fact are a tool that allows many buyers the opportunity to purchase a new home when it would not have been possible otherwise. If not having the upfront cash that you believe is necessary to cover a down-payment and closing costs is holding you back from applying for a loan, its time to starting talking to lenders and real estate agents to determine your options.