What is a Seller Credit?
When buying or selling a home, various financial considerations are involved. One such consideration is the negotiation of seller credits.
A seller credit, also known as a seller concession, is an arrangement in a real estate transaction where the seller agrees to contribute a certain amount towards the buyer’s closing costs or other expenses related to the purchase.
In my thirty-eight years of selling real estate, seller credits have been provided numerous times. Many buyers have also asked me what seller credit means.
We will explore the concept of a seller credit, how they work, and the difference between seller credits and price reductions.
Understanding Seller Credits
Seller credits are a form of financial assistance the seller provides to the buyer during home-buying. These credits can cover various expenses, including closing costs, prepaid items, repairs, or upgrades.
The seller credits are typically negotiated during the offer and counteroffer stages of the transaction. However, they are also common after a house inspection.
A seller credit for repairs is a common request from home inspection negotiations.
Repair credits are given to buyers at closing.
Seller Credit at Closing
Seller credits are typically applied as a closing cost credit, meaning they are deducted from the total amount the buyer needs to bring to the closing table.
For example, if the buyer’s closing costs amount to $10,000 and the seller agrees to provide a credit of $5,000, the buyer would only need to bring $5,000 to cover the remaining costs.
Key takeaway: A seller credit can benefit a buyer who is tight on cash. The seller’s assistance can bridge the gap and make the purchase easier financially.
How Seller Credits Work
Negotiating seller credits involves careful consideration from both the buyer and the seller. The buyer may request a seller credit in their initial offer, specifying the desired amount or percentage.
The seller can accept, reject, or propose a counteroffer with a different credit amount.
What Can a Closing Cost Credit From a Seller Cover?
These are some of the potential costs that sellers can cover as part of a buyer’s costs in purchasing a home.
- Mortgage points (Depending on the loan)
- Loan origination fees
- Cost of repairs
- Property taxes
- Inspection fees
- Appraisal fees
- Attorney’s fees
- Recording fees
- Title insurance
Factors Influencing Seller Credits
Why might a homeowner give a seller credit at closing?
Several factors can influence the negotiation of seller credits. These factors include market conditions, the property’s condition, competition, and the buyer’s financial situation.
In a buyer’s market, where inventory is high and demand is low, sellers may be more willing to offer credits to attract potential buyers.
Conversely, sellers may need more incentive to provide seller credits in a seller’s market with low inventory and high demand.
Here are some additional factors to consider about a seller credit:
Property Condition
The condition of the sold property can impact the negotiation of seller credits. Buyers may request credits to offset these expenses if a property requires significant repairs or upgrades.
Sellers who are aware of their property’s condition and potential issues may offer credits upfront to address buyer concerns and facilitate a smoother transaction.
Competition of Buyers
The level of competition among buyers can influence the negotiation of seller credits. In a competitive market with multiple interested buyers, sellers may have more leverage and be less inclined to offer credits.
For example, if there are bidding wars on houses, it is doubtful a seller will entertain a seller credit.
Conversely, if a property has been on the market for an extended period or has limited buyer interest, sellers may be more open to providing credits to attract potential buyers.
Buyer’s Financial Situation
The buyer’s financial situation can also impact the negotiation of seller credits. If a buyer has limited funds for closing costs or seeks additional financial assistance, they may request higher credits.
Sellers may consider the buyer’s financial constraints and adjust their credit offer accordingly.
Purchase Price
The property’s purchase price can indirectly affect the negotiation of seller credits. Buyers may request credits if they believe the property is overpriced or face challenges obtaining financing due to a higher purchase price.
Sellers may need to assess whether providing credits is more beneficial than reducing the price to meet buyer expectations.
A Seller’s Motivation
The motivation of the seller to close the transaction quickly or address specific buyer concerns can also influence the negotiation of seller credits.
Sellers motivated to sell promptly may be more willing to provide credits to incentivize buyers and facilitate a smoother transaction.
Whether credits are given can often come down to whether it is a buyer’s or seller’s market.
Local Practices and Customs
Seller credit norms vary based on local practices and customs in different real estate markets. Buyers and sellers must be aware of the prevailing practices in their locations.
Real estate agents with local market expertise can provide valuable insights into customary seller credit arrangements.
When is a Seller Credit Most Often Offered?
The most common times a real estate transaction includes a credit is under the following circumstances:
- To cover all or part of repair costs from a home inspection.
- Helping a buyer cover their closing costs.
- To make your home more saleable by offering the buyer an incentive upfront.
- An incentive during negotiations to help convince the buyer to purchase.
Seller Credit vs. Price Reduction
It’s important to distinguish between seller credits and price reductions. While both can help address buyer concerns, they function differently.
A seller credit directly impacts the closing costs or other expenses the buyer has to pay, effectively reducing the buyer’s out-of-pocket expenses.
On the other hand, a price reduction directly affects the overall purchase price of the property, potentially leading to a lower mortgage amount and monthly payments for the buyer.
Key takeaway: A seller credit vs. a price reduction could be more beneficial depending on the circumstances.
There Are Limits on Seller Credits With Mortgage Lenders
One vital consideration with a seller’s credit is understanding that lenders have restrictions on them. There are maximum credits that can be applied based on the loan type.
You may be wondering how much a seller can credit for closing costs.
We will examine each so you are not surprised.
Max Seller Credit on a Conventional Loan
- For a buyer who puts less than 10% down on a primary or secondary home, the maximum contribution is 3%.
- For a buyer who puts 10%–25% on a primary or secondary home, the maximum contribution is 6%.
- Buyers who put down 25% or more on a primary or secondary home have a maximum contribution of 9%.
- Investment properties with down payments of any amount have a maximum contribution of 2%.
Max Seller Credit on an FHA Loan
The maximum seller credit on FHA loans is 6% of the purchase price. Further, the credit can only be used for discount points, interest rate buy downs, and closing costs.
Max Seller Credit on a VA Loan
The maximum seller credit on VA loans is 4% of the home loan. The VA is also stricter about not allowing credits to be applied to mortgage points.
Max Seller Credit on a USDA Loan
The seller credit the USDA allows is 6% of the sales price.
Key takeaway: There are maximum contributions sellers can make for buyer closing credits.
Can A Seller Credit Be Used For a Down Payment?
No. A seller credit cannot be used towards a buyer’s down payment. A home seller cannot give money to a buyer in this fashion.
Considerations for Buyers and Sellers With Seller Credits
For buyers, seller credits can be a valuable tool to help manage the upfront costs of purchasing a home. Buyers may have more financial flexibility by reducing the cash required at closing. However, it’s essential for buyers to carefully evaluate the terms and conditions of the seller’s credit to ensure it aligns with their specific needs.
For sellers, offering a seller credit can make their property more attractive to potential buyers, especially in a competitive market. Closing on a house may happen faster when incentives are offered.
However, sellers should also consider the potential impact on their net proceeds from the sale. It’s crucial to weigh the benefits of a quicker sale against the financial implications of providing credit.
Final Thoughts
You should now have a much better understanding of what a seller’s credit is when buying a house.
Seller credits play a significant role in real estate transactions by providing financial assistance to buyers. These credits can help alleviate some of the upfront costs of purchasing a home, ultimately making homeownership more accessible.
Whether you are a buyer or a seller, understanding how seller credits work can empower you to make informed decisions during the negotiation process.
Remember to consult with your real estate agent or professional to ensure you fully comprehend the implications of seller credits in your specific situation.
About the Author: The above Real Estate information on what a seller credit is was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for 37+ Years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
