In the real estate world, there are usually two parties that need to be connected. Buyers looking for their dream homes, and sellers looking for buyers who love their homes.
If you belong to one of these parties, you’ve come to the right place.
In real estate, buyers and sellers are looking to find each other. Once they find each other, they need to agree on a price for a property and sign a purchase agreement.
There is one key difference between buyers and sellers: Buyers want the lowest purchase price possible but still get the house of their dreams. Sellers want the highest sale price possible without taking too long to get their homes sold.
Seller credits are an excellent way for home buyers and sellers to reach an agreement on a deal and get to closing time. Especially if they’re not that far apart in price.
What Are Seller Credits?
Seller credits are closing costs that the seller has agreed to pay.
When the seller offers to cover closing costs, they might sell their home a little quicker. It can also be just the incentive needed to entice buyers to make an offer. In this article, we’ll look at different times when offering seller credits can help to get a deal done.
Seller Credits Help Offset The Cost Of Buying A Home
Buying a home is probably the largest single purchase any of us will make in our lifetime. But if you think property prices are high, this is only part of the story!
Most of us will get a mortgage to finance the purchase. But even if a bank is going to front most of it, a buyer still needs to bring a large amount of money to the table!
- Down payment. To qualify for a mortgage, buyers are required to put in some of their own money. A down payment can be between 3% and 20% of the price of the home. Mortgage lenders want to know you have skin in the game!
- Loan origination costs. There are various lender fees you’ll need to pay. These typically include an application fee, an underwriting fee, and a processing fee. In addition, you might pay “points” to get a lower mortgage interest rate.
- Buyer’s closing costs. During the home-buying process, buyers will need to pay for a range of services and costs. Closing costs include title insurance, home inspection fees, recording fees, appraisal fees, attorney fees, and much more!
For every $100,000 you spend on a home, you will need a down payment of between $3,000 and $20,000. In addition, closing costs will run you between 2% to 6% of the home’s value. This is another $2,000 to $6,000 for every $100,000 of the purchase price. Naturally, a buyer wants to reduce their out of pocket costs.
When To Offer Seller Credits?
Seller’s credits won’t be offered on every deal in every real estate market.
In a strong seller’s market, sellers do not need to offer seller credits. In this housing market, buyers will be competing with each other to buy a property. There may be multiple offers on each home with buyers trying to outbid the next. During a seller’s market, sellers don’t need to offer seller concessions to get their property sold.
>> AGENT ANSWERS: How much of the selling price do I get?
So, when are sellers likely to offer sales concessions in the form of seller credits? The following three circumstances make it more likely:
During A Buyer’s Market
When the real estate market softens, sellers aren’t in the driver’s seat anymore. This is called a buyer’s market. Typically, it’s called a buyer’s market when there are more properties for sale than there are buyers. This could happen during a recession, or when unemployment is high.
Currently, rising interest rates are making it harder for buyers to qualify for mortgages. When sellers are struggling to get their homes sold, seller credits can be a good idea.
Low Demand For The Home
The level of demand for the home is another reason a seller may need to offer incentives. If the house has a bad location or is in poor condition, a seller may need to discount the price of their home, or also seller credits.
Urgency To Sell
Some sellers may be in no rush to sell, and it doesn’t matter how long their house sits on the market. For example, if they are downsizing after the kids leave home, they probably don’t need to rush to move. On the other hand, a seller may need to relocate quickly to start a new job, and they can’t wait to sell. A seller may also have financial difficulties making the sale of their home more urgent.
Typical Seller Credit Scenarios
We know that seller credits are there to lower the closing costs for the buyer, but seller credits don’t always look the same. In this section, we look at some typical ways that seller credits are offered and how they could be structured.
#1 An Incentive To Seal The Deal.
In its simplest form, a seller credit is a fixed amount or percentage of the closing costs. If your home has been on the market for longer than you’d like, offering to cover closing costs can help to move things along. Offering seller credit shows buyers you are willing to help them out without having to budge on your asking price.
A Seller Credit can only be used for closing costs or the specified purpose. If a seller credit of $5000 is offered, but closing costs are only $4500, the buyer does not put $500 in their pocket. The remaining money is returned to the seller!
#2 A Seller Credit To Offset Repair Costs.
A seller can offer a repair credit to pay for repairs as a concession to an interested buyer. This type of seller credit usually gets offered when the home inspection flags some specific issues, not just for minor repairs. But this type of seller concession has advantages and disadvantages.
Some sellers don’t want the trouble of doing home repairs before selling. Maybe they’re in a rush to get the home sold and move on. It can also be a good idea to avoid repairs where the buyer may not like the result. For example, a house that needs new siding. A buyer may prefer a seller credit and choose the color and type of siding themselves.
However, there are disadvantages to offering a seller credit to offset repair costs. If the home inspection picked up on the need for serious repairs, this can affect the sale. It certainly puts the purchase price in question.
Firstly, a buyer may wish to walk away from a deal if there are serious issues. What if the inspection shows the house has serious foundation issues? Or that the roof is about to blow off in the next breeze?
Second, offering a seller credit may not be enough to keep the deal on track! Also, offering a seller credit for a more significant repair can cause red flags during the closing or appraisal of the home. A lender may refuse to finance a buyer’s mortgage, even if both the buyer and seller want to go ahead.
Keep the terms of the seller credit general to avoid flagging problems at closing or during appraisal.
The contract should include a home inspection contingency. This gives the buyer the option to walk away from the purchase if the house has serious issues.
#3 A Seller Credit To Offset Some Costs Of Home Ownership
This type of seller credit is popular with first-time homeowners who might not be used to all the costs associated with owning a home. There is nothing worse than moving into your new dream home, and the AC stops working on the hottest day of the year. Handing over a few hundred dollars to a plumber or electrician can really hurt.
The seller may offer to pay for a home warranty for a year or two. Other popular incentives could be prepaying property taxes or HOA fees. This type of seller credit is usually in the form of a check of equivalent value at closing.
Know the rules of the mortgage lender and what they allow as seller credit. Keep the terms flexible so that it is not complicated to access the funds at closing.
#4 A Seller Credit Can Help A Buyer Qualify For A Mortgage
At the beginning of this article, we saw that a home buyer needs between 5% and 25% of the asking price of their dream home in cash. A down payment, loan origination fees, and closing costs can really add up. If the buyer is struggling to come up with the amount of money needed, a seller credit can be a great way to close the deal.
This is a case that can be a win-win for both buyer and seller. To explain how it works, let’s look at some numbers.
Example: A buyer wants to purchase a home for $250,000. They are planning to make a 20% down payment, or $50,000. They also need an estimated 3% for closing costs, or $7,500. This buyer needs at least $57,500 in cash to buy the house!
The seller can offer a seller credit to cover the $7,500 and the buyer can agree to offer $257,500 for the house. The benefit to the buyer is that they can lump the closing costs into their mortgage, and they need less cash at closing. The benefit for the seller is that they get a higher asking price without being out of pocket for the closing costs.
Keep in mind that the house must still appraise for the higher purchase price. The loan amount a buyer can qualify for is based on the appraised value of the property.
Limits To Seller Credits
Be aware of the rules and laws that limit seller credits. Your real estate agent or mortgage lender can give you specific advice.
Remember, seller credits must be offered to offset legitimate buyer’s closing costs. They are not a cash incentive that goes into the buyer’s pocket.
Depending on the loan type, there are also caps on how much can be offered as seller credit. For conventional loans, the cap is based on the size of your down payment. For a 10% down payment, the cap is 3% of the purchase price. This increases to 6% for a down payment of up to 25%.
The maximum seller credit allowed for an investment property is 2%. For other specialized loan programs, the limits are 6% for an FHA loan or USDA loan, and 4% for VA loans.
Each type of loan has specific rules and restrictions for how high seller credits can be and how they can be used.
Seller Credits – The Good, The Great, and Pitfalls To Avoid
In this article, we looked at the different ways seller credits can help buyers and sellers get the deal done. We also gave helpful tips for getting the most out of seller credits. And how to avoid some of the pitfalls.
Whether you are looking to buy or sell a home, the top real estate agents listed on FastExpert will be able to advise you.