Why Use Seller Credits at Closing?

Seller credits, also known as seller concessions or interested party contributions, refer to a common practice in real estate transactions. In this article, we will define a seller’s credit, explore common scenarios in which a seller offers concessions, the costs these concessions cover, and the process used in this kind of agreement. 

What is a Seller Credit?

A seller credit is an arrangement in which a seller offers financial assistance to the buyer to cover certain costs associated with the real estate sale. The assistance typically comes in the form of a credit towards the buyer’s closing costs or other expenses.

Seller credits are negotiated and agreed upon in the purchase contract. However, offering seller credits is subject to certain limits and regulations, which can vary depending on the type of mortgage and the lender’s guidelines.

• Why Would a Seller Cover Buyer’s Closing Costs?

Property owners offer seller credits for several reasons, but mostly to ensure they will seal the deal in competitive market conditions. They usually give closing cost credit to attract more offers, gain a negotiating tool, speed up the process, or obtain a higher purchase price. 

• Housing Market Impact on Seller Credits

Market conditions are an essential factor for understanding seller credits. In a seller’s market, there are more buyers than properties for sale, meaning sellers have an advantage. The situation is the opposite in buyer’s markets, where the buyers have more choices, so property owners use concessions more frequently. 

Scenarios Where Seller Credit Is Used

While the real estate market decides whether there will be more or fewer sellers who offer credits, the goals of offering them remain largely the same.

• Incentivize the Buyer

Sellers offer credit to attract hesitant buyers or incentivize buyers with limited funds for closing costs. In a seller’s market, they attract more offers, which may give them a higher sales price. In a buyer’s market, they stand out from their competition and increase their chances of closing the deal. 

• Counteract the Cost of Home Repairs

A home inspection contingency gives the buyer the right to negotiate repairs or cancel the contract if the home inspection shows issues. In this case, the buyer or their real estate agent may create a list of required repairs before accepting the deal. The seller may offer a repair credit instead of fixing each item or lowering the purchase price.

• Seal the Sale Faster

If a property owner wants to close the deal faster, they may offer a concession to sweeten the deal for the buyer and shorten the negotiation process. This is true if the house is in danger of spending an extended period on the market.

Concessions are especially useful for home buyers with limited funds for upfront costs. They also help speed up repairs when needed, as the seller can sell the home without waiting for contractors to finish. 

Costs Seller Credit Covers

Sales concessions can cover various expenses related to the home-buying process, depending on what the buyer and the seller agree on:

• Closing Costs

The closing cost credit includes lender fees, appraisal fees, escrow fees, title insurance, recording fees, attorney fees, and other expenses associated with closing the sale.

• Prepaid Expenses

These include property taxes, homeowners insurance premiums, and prepaid interest.

• Repair Costs

An owner may offer seller credits instead of repairing the property to entice the buyer to continue with the deal.

• HOA Fees

If the property is part of a homeowners association (HOA), seller credits can cover any HOA transfer fees or dues the buyer owes.

• Home Warranty

The seller may add a home warranty to entice buyers. 

• Mortgage Discount Points

In some real estate transactions, seller credits can decrease the interest rate and lower the buyer’s monthly mortgage payments.

Can a Seller Credit Be Used for Repairs?

The lender determines if seller credit can cover repairs. However, the seller can always offer to cover the buyer’s closing costs with a credit equal to the repair costs. Mortgage lenders may also have special requirements for repair credits. Here are some common requirements:

• The purchase agreement must document the repair credit.
• The buyer’s mortgage lender may ask to assess the scope of repairs to ensure the repairs do not threaten the property’s appraised value or safety.
• The use of credits may affect the Loan to Value ( LTV), which may change the terms for the buyer.
• The purchase agreement must comply with regulations.
• The lender may want to verify the repairs have been completed.

Lender Limits for Seller Credit

Fannie Mae and Freddie Mac set maximum seller credits depending on the loan type, down payment, and whether or not you will live in the property. They are expressed as a percentage of the property’s purchase price.

However, the seller credit cannot exceed the closing costs, as that would mean it covers a portion of the down payment, which isn’t allowed. In addition to the maximum amount, there are also additional regulations for unconventional loans.

• What is a seller credit limit supposed to achieve?

Seller credits are also called interested party contributions. Interested parties may include sellers, real estate agents, and developers. Furthermore, since they receive financial incentives when you purchase the home, they may try to entice you with large contributions.

However, these may cause you to incur more debt than you can afford or change your LTV, requiring you to pay mortgage insurance (which may cost you more). These limits may seem unappealing to home buyers, but the regulations are there to protect them.  

• Seller Credit Limit Per Loan Type

Here are the seller credit limits for different types of loans:

Conventional Loans

For a conventional loan, the seller’s credit limits are as follows:

• If your down payment is less than 10% of the purchase price, the maximum seller credit is 3% (primary home only). 
• If your down payment is 10% or more, the maximum seller concession is 6% (applies to your primary or secondary home). 
• For conventional adjustable or fixed-rate loans with a downpayment of 25% or more, the maximum seller concession is 9% (primary or secondary home).
• The maximum seller credit for investment properties is 2%, regardless of the down payment size. 

FHA Loans and USDA Loans

For a Federal Housing Administration ( FHA) loan or a U.S. Department of Agriculture (USDA) loan, the maximum credit is 6%, regardless of down payment size. Also, you can only get seller credits for USDA or FHA loans if you use them to purchase a primary residence. 

VA Loans

The maximum a seller can contribute for a Veteran’s Administration (VA) loan is 4%, regardless of your down payment. They can only offer a seller credit if you use the home loan for a primary residence.

Jumbo Loans

Jumbo loans are non-qualifying loans because they exceed the FHA home loan limit. However, they are still conventional loans. This means the seller credit for jumbo loans is capped at 9% of the purchase price. 

Bank Statement Loans

Bank statement loans are a type of non-qualified loans. The maximum interested party contribution is 6% of the sales price if you’re purchasing a secondary or primary residence. If you’re purchasing an investment property, the 2% rule applies here, too.

DSCR Loans

Debt Service Coverage Ratio (DSCR) loans are designed for investment properties, meaning the seller credits cannot exceed 2% of the sales price. These loans are underwritten with the property’s earning potential in mind instead of the borrower’s finances.

The Seller Credit Process

Seller credits work by covering the actual closing costs or other real estate transaction expenses for the buyer. Before discussing seller credits, it helps to determine whether it is a buyer’s market (or a seller’s market) to adjust your expectations. 

• Agreement Between the Buyer and the Seller

During the negotiation process, the buyer and seller need to agree on the details of the agreement, typically with the help of a real estate agent. The seller may agree to cover closing costs (fully or partially) and transaction expenses. Here are some common considerations: 

Repair Credit

Buyers should itemize the repairs the home inspection shows are necessary and get contractor quotes. Specific requests are more likely to be accepted, and the lender may also require them.

Closing Cost Credit

Review what costs the seller may be willing to cover.

Non-Realty Items of Value

These personal property items affect the home’s total price. Some homes are sold with livestock, equipment, or furniture. List your expectations to prevent any misunderstandings.

Tax Implications

There are usually no negative tax implications, and there may even be deductions, such as if the seller agrees to pay for discount points.

Priorities

Know your most important requests and what may be too much for the seller.

If both parties agree to seller credits, it’s usually documented in the purchase agreement or addendum. This document specifies the amount of the credit and any conditions attached to it.

• Lender Approval

Lenders typically have guidelines and limits on the amount of seller credits that can be applied, as these credits can affect the loan-to-value ratio and the overall risk of the mortgage. The lender will review the proposed seller credits as part of the loan application process, considering factors such as the buyer’s financial profile, the type of loan, loan amount, and the property’s appraisal value before approving the credits.

Seller credits can adjust the purchase price downward. For example, if a property is listed for $200,000 but the buyer negotiates $5,000 in seller credits, the purchase price effectively becomes $195,000 after accounting for the credits. This adjusted purchase price can impact the loan amount and the LTV calculation.

• Adjustment of Closing Costs

The seller’s credit covers the buyer’s closing costs or other agreed-upon expenses at closing. These can include loan origination fees (which vary with the loan amount), appraisal fees, title insurance, and escrow fees.

The seller doesn’t typically pay the buyer directly for these credits. Instead, the seller’s credit is in the settlement statement or Closing Disclosure prepared by the escrow or closing agent. The credit reduces the amount the buyer needs to bring to closing.

During the closing process, the escrow or closing agent disburses funds according to the settlement statement. Any seller credits are deducted from the seller’s proceeds, while the buyer may still need to bring funds for their portion of closing costs, down payment, and other expenses.

Bottom Line

Seller credits are a helpful real estate transaction tool, providing both buyers and sellers flexibility and benefits. They help sellers attract prospective buyers, close deals faster, and resolve common issues like repairs. By easing the burden on the buyer’s budget, they may get more offers and sell their property for a higher price.

As an independent broker focused on technology, convenience, and favorable terms for home buyers, F5 Mortgage allows seller concessions on different loan types. We make navigating the real estate market less stressful and expensive for our clients. Call us at 1-888-459-0483 to discuss your options, or click here to contact us. 

Seller Credit FAQs

Who benefits from a seller credit?

Both the buyer and the seller may benefit from a seller credit. However, since the credit saves the buyer money, it is slightly more favorable for the buyer. Still, if sellers offer credits, they may close the deal faster, save repair time, and attract more offers.

Can a seller credit be used for a down payment?

No, this is strictly against regulations, as the buyer provides the down payment. A seller credit can only go towards other expenses, whether prepaid or closing costs. However, offering a seller credit lowers the buyer’s total costs, allowing them to allocate more funds for the down payment.

What if the seller’s credit exceeds the closing costs?

If the credit exceeds the closing costs, the seller will be asked to lower their credit. Seller credit is not allowed to exceed actual closing costs, which would mean the credit is going toward the down payment. 

How do you estimate closing costs?

Generally, closing costs are calculated as a percentage of the purchase price. You will not know how much they are until you need to close, as they include different out-of-pocket costs. Still, the rule of thumb is to expect between 2% and 5% of the home’s sale price.