When buying or selling a home, you may hear the term “sellers credit” also referred to as “seller’s concessions.” But what exactly do those terms mean and how can they be useful in a real estate transaction?
Simply put, seller credits are when the home seller agrees to pay for certain expenses in order to facilitate the sale of their home. Seller concessions/credits allow for flexibility in negotiations to ensure a smooth closing.
What’s important to keep in mind is the timing of how money will be applied to a deal – getting money now vs later. Let’s explore.
How Do Seller Credits Work?
Instead of reducing the purchase price dollar-for-dollar, the seller provides a credit that the buyer can use for various closing costs, repairs or other needs, immediately. They’re commonly used to cover buyer expenses like title insurance fees, taxes, or points on the mortgage loan.
A seller credit means the seller is essentially reducing their profit from the home sale to cover costs the buyer would otherwise owe at closing.
Let’s walk through an example. Let’s say there’s a leak in the roof that a contractor says will cost $5,000 to repair. Rather than reducing the price of the home from $450,000 to $445,000, the seller will keep the price of the home the same, but offer a credit of $5,000 to the buyer.
The price of the home on the contract will still say 450K, but there will be an addendum/rider of a 5K seller credit to be paid to the buyer. This is important because the buyer will receive the $5K upon closing so that they will have money to pay for the repairs immediately.
Assuming the buyer is getting a loan/mortgage to pay for the home, if the price of the home were reduced by 5K (450K to 445K), the buyer would only be saving $15-20/month on their mortgage payment over 30 years, but they will have to take $5,000 out of their bank account to pay for repairs immediately.
Reducing the price of the home saves you money over the long term, but seller’s credits saves you money in the short term – immediately.
Common Uses for Seller Credits
Repairs are just one example of where seller’s credit can be applied. Here are some other examples of the most common uses for seller credits in a transaction:
- Closing Costs: Seller credits can provide thousands in credits toward closing fees like lender origination charges, appraisal fees, or title examination. This helps reduce the buyer’s cash needed at closing.
- Down Payment: Some sellers offer credits to help fund the buyer’s mortgage down payment, again reducing the cash they will need to pay upfront.
- Discount Points: By providing credits toward buying down the interest rate, the monthly mortgage payment can be reduced from say, 5.5% to 5.25% interest rate by buying down the rate, reducing monthly payments over the long term.
Are There Limits on Seller Credits?
The maximum seller credit allowed depends on the type of loan program.
- Conventional conforming loans allow total seller credits up to 6% of the purchase price. So on a $300,000 home, an $18,000 concession is allowed.
- FHA loans typically permit up to 6% as well.
- VA loans have no cap on how much in seller credits can be provided.
- Jumbo loans have more flexibility too in approving unlimited credits, especially if the appraisal supports value above the sale price.
Make Sure Credits Align with Appraisal
While sellers can legally offer unlimited credits for VA loans or even jumbo loans, the closing value must align with appraised value as well.
If the appraisal doesn’t support the combined purchase price plus closing credits, limitations may still exist in practice depending on the lender’s policies.
Seller Credits Help Deals Progress
Offering credits toward repairs or closing expenses can often make the difference in moving a home sale forward in today’s markets. As a buyer, if you’re not in a multiple offer situation, be sure to negotiate for as much in seller credits as possible to offset expenses that might bust your home buying budget otherwise.
This is not widely discussed, but concessions also help maintain property values in the neighborhood as well. The industry generally uses the sales comparison approach to value homes; recent closings/home sales in a neighborhood help determine the price of similar homes in the area.
If a homeowner discounts the sale of their home, the home could now be used as a “comp” (comparison) for future home sales in the neighborhood. The homeowner obviously had to do it to be fair to the buyer because their property was not in good condition.
However, if for example, a 10K seller’s credit is offered, rather than lowering the price of the home from 450K to 440K, the property values are better protected because public data shows the home sale price of 450K, not 440K.
One could argue that this higher public number helps the seller (psychologically at least) and the buyer as well. Of course, the inside professionals working on the transaction know that the “real” transaction value was 440K, but the outside world doesn’t.
With some savvy negotiation and creative use of concessions, buyers and sellers alike can both get what they want from the home sale.
Partner with a trusted real estate agent to help craft a win-win deal using seller credits to cover buyer costs at closing.