You have found the home you love, put in an offer, and the offer is accepted. Wouldn’t it be nice if the home buying process was so simply? But, now you enter negotiations with the seller. Once you have put an offer on a home and you begin negotiating, you will most likely have the home inspected and appraised. Then, armed with the knowledge from the inspection and appraisal you may decide to ask the seller for a credit towards the cost of repairs or towards the closing costs. But, a seller credit is not so simple and it is important for both sellers and buyers to fully understand how a seller credit works.
First, there are many ways to deal with seller credits. Some sellers may opt to complete requested repairs instead of paying seller credits. Or, the buyer can request the seller pay a credit that goes directly to an agreed upon contractor to make the repairs. Or, the seller can pay a credit for repairs that will go towards the closing costs of the loan. But ultimately, seller credits can benefit both the buyer and seller if it gets the deal done. If a buyer really wants a seller credit to use towards closing costs but the seller is not budging, the buyer can increase their offer on the purchase price but ask for a seller credit, which may entice the seller to agree.
There are limitations to what can be done with the seller credit so it is important to understand the rules. The Washington Post elaborates on the specifics of how seller credits work, “At this point, no. If you agreed to pay “up to” $8,000 of the buyer’s costs, you will almost surely end up paying $8,000 or close to it. Any part of the $8,000 that is not needed to pay lender fees or third-party fees can be used to pay points that reduce the borrower’s interest rate. It will not end up back with you…The cash-constrained buyer who agrees to pay $308,000 to receive an $8,000 contribution should aim to use the $8,000 to pay lender fees and third-party charges and use whatever is left to buy down the interest rate by paying points. For example, if fixed-dollar lender fees are $800 and third-party charges $2,200, the $5,000 remaining should buy down the rate on a 30-year fixed-rate mortgage of $277,200 (90 percent of $308,000) by about 0.625 percentage points.” A seller credit can never go towards a down payment or be given to the buyer in the form of cash. The seller credit negotiations are not handled by the mortgage lender but, rather, by the realtor. And, you will only receive the seller credits at closing if it is negotiated, agreed upon and included in the Purchase and Sale Agreement. Be sure to negotiate the full amount and if there will be money left after closing, use it towards paying down mortgage rate percentage points or for some other fee.