Often referred to as seller concessions, seller credits are offered to buyers or asked for by buyers. These credits allow the buyer to finance their closing costs and purchase a home with less cash down.
However, it is not always that cut and dry. Here is what you should know about seller credits:
How exactly do seller credits work?
The seller can list their home on the market advertising that they will provide seller credit. This works well in a buyer’s market.
However, we are currently in a seller’s market, so it is not as likely to see this done.
When a buyer makes an offer on a home, they state in the offer how much they are asking for in seller concessions and then it is written into the sales contract.
This is usually a dollar amount or percentage of the offer price.
Adding to your offer price
One way that a buyer can make a favorable offer for both themselves and the seller is to add the seller concession onto the asking price, rolling the closing costs into their loan.
So, if the buyer needs $6,000 in closing costs, they will ask for that concession on a $250,000 home but offer $6,000 above asking price to balance it out. Everyone wins, right? Well, not exactly.
This could be tricky if the appraisal comes back lower than that offer. Most mortgages will not lend out more than what the home is worth or appraised for.
Mortgage rules
Also keep in mind that certain loan types have specific rules on seller credits. For example, FHA loans will not let the buyer ask for more than 6% of the purchase price in seller assist.
Additionally, when your lender processes your application, they look at your cash funds. If you do not have enough to cover both the down payment and closing costs, they will make the loan contingent upon receiving seller concessions.
This is to protect the lender and ensure it is a safe investment for all parties involved.
Other options
If you cannot secure seller concessions and fear you will not have enough to cover your closing costs – there is another solution.
Depending on the funds and relationship you have with family members, you can accept a gift payment from them to help cover closing costs.
These funds are non-taxable up to $15,000 and some home loans will not let a gift payment be put towards a down payment – only closing costs. Also, the funds must come from an immediate family member and be wired on closing day with a detailed gift letter your lender will draft.
The money is agreed to be a gift with no expectation of repayment.
If you are still concerned about the price of closing costs – read more here about how to lower them.
