What are Seller Credits & How to Leverage Them to Purchase Your Home?
Upfront costs are one of the biggest hurdles in buying a home. Seller credits and concessions can help lower those costs, bridging the affordability gap in today’s housing market. Let’s take a look at how seller credits work – and how they might help you.
Seller Credits vs. Concessions: What’s the Difference?
During the homebuying process, you’ve likely heard real estate agents discuss credits and concessions. Both terms refer to the seller helping cover some of your costs, but they don’t mean exactly the same thing.
- Seller concessions” is a broad umbrella term. They include anything the seller agrees to pay for on your behalf, such as repairs, a one-year home warranty, or a homeowners’ association fee. If it lowers your out-of-pocket cost, it’s a concession.
- “Seller credits” are specific types of concessions. A seller credit is a dollar amount in writing that gets applied to allowable closing costs. Rather than cash, the buyer gets a reduction in the amount they need to bring to the closing table.
All seller credits are concessions, but not every concession is a credit.
For example, if a seller pays to fix a broken window, that’s a concession. If at closing, the seller gives the buyer a $200 reduction in the amount due so the buyer can fix the window themselves, that’s a credit.
Both concessions and credits serve the same purpose: reducing the buyer’s upfront cash burden.
How Credits Work in Practice
Seller credits don’t appear on their own – you have to negotiate for them.
The Process
Most credit conversations start after the inspection, when issues pop up – like a roof leak, an older water heater, or a crack in the foundation. Commonly discovered problems such as these often trigger a credit negotiation.
Rather than handling the problem themselves, sellers often agree to provide a credit. The agreed-upon amount gets written into the purchase agreement or a repair amendment. A mortgage professional will check the credit to make sure it fits your loan program’s rules.
At closing, the credit comes out of the seller’s proceeds and gets applied to your allowed costs. You never see cash; you see a smaller cash-to-close number on your side of the settlement statement.
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What can credits be used for?
The list covers a wide range of costs you normally pay out-of-pocket. Common examples include:
- Closing Costs: Credits can cover appraisal fees, loan origination charges, underwriting fees, title insurance, escrow fees, and more.
- Prepaid Items: You can often use credits for your escrow deposit, property taxes, and homeowners insurance.
- Mortgage Rate Buydowns: Credits can cover the upfront cost of a rate buydown, which lowers your interest rate – and your monthly payment.
- Repair Allowances: A repair credit reduces your closing costs, which frees up your cash to handle the repair after closing. For example, the seller can agree to a credit, such as $10,000 for an aging HVAC system, rather than fix the issue.
Limits and Requirements of Seller Credits
How much a seller can contribute depends on your loan type and your down payment. Credits can’t exceed your total closing costs and prepaid expenses. There are also loan-specific limits.
Conventional Loans
- 3% maximum if your down payment is less than 10%.
- 6% maximum if your down payment is between 10% and 25%.
- 9% maximum if your down payment is 25% or more.
- Investment Properties: Capped at just 2%, regardless of down payment.
FHA Loans
- Up to 6% of the purchase price or appraised value – whichever is lower.
VA Loans
- Sellers can contribute up to 4% of the loan amount. However, many standard fees – like your loan origination, title, and recording fees – are excluded from this cap, allowing the seller to cover all of them on top of the 4%.
Credits Benefit Both Buyers and Sellers
Benefits for Buyers
- Reduces Upfront Cash: This is the main benefit. Credits preserve your savings for moving expenses and other home-related costs.
- Improves Affordability: Significant credits, such as rate buydowns, can help make homeownership more affordable.
- Adds Flexibility: A repair credit allows you to take control of fixes.
Benefits for Sellers
- Attracts More Buyers: Offering a seller credit can help pull in more buyers.
- Faster Sales: Removing obstacles for the buyer can mean a more streamlined path to closing.
- Avoids a Price Cut: Lowering a list price can signal desperation. A credit helps maintain a home’s market value on paper.
- Deal Savers: A problem uncovered during the inspection could sink a deal. A credit can be a quick way to resolve the issue.
When should you ask for seller concessions and credits?
Knowing how and when to request credits is just as important as knowing what they are.
- After the Home Inspection: With repair needs documented by a professional, this is often the best and most common time to seek credits.
- In a Buyer’s Market: When inventory is high, sellers are often more motivated to agree to concessions.
- When a Home Has Been Sitting: If a home has been on the market for a month or more, the seller is usually more open to negotiating.
- When Interest Rates Rise: In a high-rate environment, it makes sense to use credits for a temporary or permanent buydown.
How to Negotiate Credits
While there’s no guarantee a seller will agree to concessions, you can negotiate effectively if you:
- Work With a Savvy Agent: An experienced agent can identify motivated sellers, understands local norms, and can craft professional offers.
- Be Reasonable and Justified: Anchor requests in facts. Use your inspection report, loan estimate, and recent sales to back up what you’re asking for.
- Know Your Limits: You should know the maximum allowable credit based on your loan type. And be prepared for a counteroffer – the goal is an agreement.
By understanding seller credits, you can leverage them to reduce your immediate costs and move forward with confidence. We can help you understand how credits fit into your homebuying plan. Call us at 1-888-505-8960 or connect with us online.