How Does Seller Credit Work?

Buyers often tell me they want the seller to pay some or all of their closing costs. Sometimes this is also referred to as getting seller credit, subsidy or concessions. It’s a great way to help with your closing costs, especially if you’re a little tight on cash. However, there are several misconceptions that I’d like to clarify.

So how does seller credit work?

You Need to Ask for a Specific Credit Amount

Very few sellers will just agree to pay all your closing costs. That’s because they don’t know how much this is going to be. For example, halfway through the transaction, you could decide to buy your interest rate down by purchasing points. That’s considered part of your closing costs and now the seller is on the hook for it with no way out. What if the deal no longer makes sense for them in this case? No seller wants this kind of exposure.

That’s why you need to decide on a specific dollar amount for the seller credit and put this in your offer.

How do you know the amount of your closing costs? You won’t have the final figure until right before settlement, but your lender should be able to provide a pretty accurate estimate. Then you can think how much of this would like the seller to help with.

Keep Your Lender in the Loop

Speaking of lenders, you should keep yours informed of any changes in the seller credit. These changes have to be approved by the underwriter which could take from a few hours to a few days. If this delays settlement as a result, it will be your fault and potentially bring along unpleasant consequences.

Another reason to keep your lender abreast is that there are strict limitations on how much seller credit you can receive. It cannot exceed the amount of your closing costs and effectively lower the amount of your downpayment.

When could this be a problem? Let’s say at contract ratification the seller agrees to pay an amount that covers almost all of your closing costs. Then a few issues come up at the home inspection and you’d like additional credit in lieu of repairs. If the credit exceeds your closing costs at settlement, the remaining amount will just go back to the seller.

There are some creative ways to mitigate this. One is to prepay a few months of condo/HOA dues. But it has to happen with the blessing of the underwriter. Bottom line: keep your lender in the loop.

Competitive Offers Rarely Include Seller Credit

It will be nearly impossible to get any seller credit in a multiple-offer situation. In fact, asking for such may even annoy the seller. If you can’t close the transaction without help from the seller, then you should probably avoid really hot properties where many offers are expected.

You may also think about postponing the purchase until  you can save up more money. This will make you a stronger buyer in a competitive market.

Sellers May Prefer a Lower Sales Price to Seller Credit

There are two reasons for this.

First, the credit actually costs the seller slightly more than what you receive. Let’s say you negotiate a $10K credit on a $450K purchase. This lowers the net amount to the seller by $10K, so they receive $440K. However, they pay commission on the sales price which is $450K. Assuming the commission is 6%, the seller will pay $600 more compared to a scenario where the sales price is $440K without any subsidy. Not a huge deal, but something to keep in mind.

Second, sellers are usually concerned with the appraisal coming in below sales price. If this happens, then both parties go back to the negotiating table (as described in my post on voiding contracts). So the seller would potentially get a lower payoff plus still be on the hook for paying closing costs. That’s why they’d generally prefer negotiating a lower sales price without any subsidy than a higher one, but with credits.

Do you have more questions about how seller credit works? Just contact me below:

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