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Understanding Seller Credits
Seller Credits are funds that the seller contributes to the buyers side of the transaction at settlement. These funds can be used to cover closing costs, pay for repairs and assist you in other areas based on lender approval.
This discussion is going to cover:
- An overview of seller credits
- Seller credit scenarios
- Seller credit limits
Let’s get started.
Seller Credit Overview
A seller credit is a type of seller concession where the seller offers the buyer money at closing to further entice the buyer to complete the purchase.
Closing costs typically range from 1% – 3% of the homes’ value, so the seller credit can greatly sweeten the deal for the buyer (we’ll discuss how this helps the seller as well later on).
Keep in mind it’s important to talk with your Realtor beforehand to determine whether or not the seller credits will be an option for you based on:
- Who the seller is
- Market conditions
- Overall demand for the home
Let’s dive further into the two main factors that you’ll see when dealing with seller credits.
Market Conditions
A hot real estate market likely won’t require seller credits to better incentivize a deal as there will already be a lot of demand for the property.
On the contrary, a slower real estate market/a downturn can lead to sellers offering the seller’s credit to get their home off of the market faster.
Who The Seller Is
Keep in mind that this will also be determined by who the seller is. A seller that wants to get out of the property ASAP (relocation, need for cash, etc.) will be more willing to offer credits to get the home sold.
On the contrary, a seller that has the time, capital, and resources to wait for the offer they want, may not be as inclined to offer seller credits to entice buyers.
Now that we’ve gone through what seller credits are, let’s put them into action with some scenarios that you may come across.
Seller Credit Scenarios
Scenario 1: Offset repair costs identified during home inspection
The home inspection finds that there’s water damage from a flood that will ultimately need to be addressed. By virtue of having a home inspection contingency, the buyer can propose that the seller conceded to a seller credit equivalent to $X amount rather than having to fully repair the water damage.
This helps ease the concerns of a buyer while the seller ensures the deal isn’t in jeopardy.
Note: here’s a guide that walks through the primary contingencies you’ll need to consider.
Scenario 2: Entice a buyer that’s not yet 100% committed
Your home has been on the market for longer that you would’ve liked. You decide to edit the listing so that it shows buyers you’re willing to offer a $4,000 seller credit. This shows the buyer that although you’re not budging on list price, but you’re willing to help them offset the cost a bit.
Scenario 3: Seller needs to move quickly on getting deal done
Life happens, so whether it’s a new job where you’d have to relocate, a child on the way that will require more space, or the kids leaving for college and no need for the full space, you have options.
You can offer a home warranty that assures a buyer that if something goes wrong, they’re not completely alone. Rather than directly paying for a warranty or policy, you offer the buyer a seller credit of equivalent value at closing. This means that in the event of an issue within the predetermined warranty timeframe, the costs will be offset by the seller.
Scenario 4: Include closing costs into the buyer’s mortgage
When you find yourself in a scenario where your listed home is at the higher end of the buyer’s budget, challenges arise when it comes to closing costs as a buyer is now tapped on cash. In this scenario there’s a way to satisfy both the sellers list price and the buyer’s cash-strapped wallet.
You essentially raise the list price of your home so that the buyer can roll closing costs into the mortgage, while offering seller credits to apply toward the closing costs so that they don’t have to come up with more immediate cash.
Here’s an example:
– 500K List Price
– 515K Offer Price
– 3% Seller Credit = 15K in Credits to the buyer
The seller would net 500K since you would deduct the 3%.
In this example we added 15K to the offer price to “build in” the seller credit so that the seller can still net their $500K.
These scenarios often may sound too good to be true, but there are options out there to ensure both the buyer and seller can come to a deal.
However, there are limits to the seller credits that can be offered.
Seller Credit Limits
Based on how much money you plan on putting down for a down payment will dictate how much you can receive in seller credits.
Conventional Loans and FHA Loans
● 0-9.99% Down payment will allow for up to 3% seller credit
● 10% Down payment will allow for up to 6% seller credit
Veteran Administration Loans
● Allow for 4% seller credits above all closing costs (approximately 7% total)
It’s important to note that the total amount the seller contributes can’t exceed the total closing costs. For example, if you bought a home for $400,000 with a conventional loan and a 20% downpayment, the seller can legally contribute up to 6% ($24,000).
Note that if the closing costs only amounted to $20,000 in this example, $20k would be the max that the seller can contribute.
Limit Reasoning
The goal of capping seller credits is in an effort to curb the inflation of housing prices. If seller credits became overly generous, housing prices would ultimately increase at a more rapid pace which will deter more buyers from purchasing in the long-run.
Summary
Seller credits (seller concessions) are closing costs that the seller agrees to pay on behalf of the buyer.
This is often a win-win scenario as the seller is able to get the deal done, and the buyer is able to purchase their home while mitigating the additional expenses at settlement.
It’s best to work with your real estate team to determine if this is a fit for you, and when/where there may be homes on the market with seller credits available
Set up a consultation to get started!
