What Is Seller Credit?

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“A home sale can be an overwhelming experience. From finding the right buyer to getting the best price, there’s much to consider as a seller. What is seller credit? The term “seller credit” is probably familiar to you during the selling process. As a seller, you may be reluctant to offer any buyer a credit. However, it’s important to note that the seller’s credit can be a significant financial advantage.”

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What Is Seller Credit?

It may appear insignificant initially, but it’s often more than meets the eye. The seller credit might just be the key to securing the deal you’ve been searching for, providing you with a financial cushion and peace of mind. Keep reading to learn more about what is seller credit and to determine whether they are worth offering to your buyers.

 

Seller credits: what are they?

Seller credits are not just funds given by the seller to the buyer at the end of a sale. They are flexible negotiation tools tailored to your specific needs as a seller. This flexibility can empower you to complete the transaction without any last-minute surprises, as you can use the seller credit to cover repair or closing costs as needed.

In 2024, NAR estimates that 46% of sellers will use financial incentives, such as seller credits, to entice buyers. This widespread use of seller credits reassures you that it’s a familiar and accepted negotiation tactic, not a sign of desperation. So, if you’re considering offering a seller credit, you’re in good company.

A seller credit may not be necessary in a seller’s market since the buyer will probably have competition from other offers. How much of a seller credit you’ll need depends on several factors, including the local market.

 

Seller credits: what they cover

What is seller credit? Seller credits are versatile, as they can cover a significant portion, if not all, of a buyer’s closing costs. However, it’s worth noting that this may vary slightly. You’ll likely have to contribute a specific percentage of the closing costs as a seller.

These are some of the closing costs you may be able to cover with your seller credit:

  • Taxes on property
  • The origination fee for a loan
  • Fees for inspections
  • Insurance for title
  • Fees for appraisals
  • Fees for recording
  • Fees for attorneys
  • Repair costs
  • Points on a mortgage

 

What Are The Circumstances In Which Seller Credits Become Necessary?

While some sellers may be hesitant to offer a seller credit, there are specific situations where it can work to your advantage. Understanding these scenarios can help you make a more informed decision about whether to offer one.

The following scenarios are common reasons why sellers offer credit to buyers.

 

To offset repair costs

A home inspection contingency in the deal can help buyers gain an upper hand in negotiations. A home inspection contingency that allows a buyer to walk away from the deal could give your buyer the upper hand.

Attempting to repair the problem yourself can be a significant headache. Contractors can charge high fees, leading to months-long closing delays.

If you want to close quickly without losing your buyer, your best option is to give them seller credit. Instead of completing the repairs yourself, you can offer the buyer a repair credit at closing. As a result, you will experience a smooth closing process without worrying about repairs.

 

Getting a hesitant buyer to buy

Selling your home can be challenging when you have yet to receive any leads for months. If you are desperate for the process to be over, you might consider dropping the price.

Prospective buyers may view your listing price as indicating that your property has a problem, so lowering it can hurt you more than you help. If you include a seller credit in the listing price, you can maintain your original price and attract buyers by saving them money on closing costs.

Sellers in a seller’s market won’t likely need a seller credit since they will be competing with others to buy your home, so you won’t have to provide a seller credit.

 

Assisting the buyer with closing costs

When you’ve found a buyer for your home, they offer a price that exceeds their budget. However, they may need more cash to complete the transaction.

Fortunately, with the help of a seller credit, you can prevent the deal from falling through. You raise the price of your house and give the buyer credit for the difference. There will be a reduction in your closing costs, and your home will be sold quickly for the agreed-upon price.

 

For a faster closing

Selling your home can be time-sensitive. For example, if you want to start an out-of-state job or have your family settled in before school starts, you may need to sell your house as soon as possible.

Seller credits come in handy here. By putting specific incentives on your listing, you can entice buyers quickly. Things like one-year home warranties, flood insurance, or natural disaster insurance can make your house stand out from the competition. Give the buyer credit at closing rather than directly paying for these policies.

 

Limits on seller credit

As the seller, you have limits to what you can offer. This mainly depends on the type of loan the buyer has. You can contribute up to 6% of the loan amount to FHA or USDA loans. Depending on the size of the down payment, you can contribute up to 9% to conventional loans.

Seller credit limits are intended to prevent the housing market from inflating. Although astronomical credits may make it easier to sell a home, they will eventually cause home and rent prices to rise uncontrollably.

 

Benefits and Drawbacks of Seller Credits

Offering seller credits has advantages and disadvantages. When deciding whether or not to offer one, you should consider your needs as a seller and the state of your local market.

 

Benefits and Drawbacks

 

These are some of the pros and cons of seller credits that you should consider before deciding.

 

The advantages of seller credits

If a buyer’s market exists, seller credits can give you an advantage over the competition. You’ll also be able to overcome barriers like expensive repairs, enabling you to negotiate more effectively.

In addition, seller credits can be helpful if you are in a hurry to sell your house. They can encourage buyers to make an offer immediately or even prevent your deal from falling through if your buyer has trouble paying closing costs.

 

The disadvantages of seller credits

Nevertheless, there are some disadvantages to be aware of as a seller. You may be able to save your buyer close to closing costs by increasing the sale price and offering credit, but it also comes with some risk.

You may not be able to take advantage of the benefits of your credit if your home does not appraise at a higher value, as the buyer will have to pay the difference at closing out-of-pocket. In addition, closing fees may fluctuate unexpectedly. The increase in closing costs may result in you spending more than you anticipated if you’ve agreed to pay a percentage of the closing costs.

 

Here Are Some Examples of Seller Credits in Action

What is seller credit? Buyers and sellers may negotiate seller credits in various scenarios to advance a sale. Here are a few examples:

 

Reduce the cost of home inspection-identified repairs.

An inspection of the driveway reveals deep cracks that are a safety hazard. Since the buyer has written a contingency for the home inspection, they may leave the deal if you do not concede to the repair. Your buyer asks you to address the problem during their inspection negotiations.

Your contractor estimates the repair will cost $1,000 and take between three and six weeks to complete. You want to close quickly so that you can move your family into your new home before the new school year begins. Instead of agreeing to repair the property, you offer the buyer a “repair credit” at closing that will equal the amount.

 

Make the deal more enticing for an on-the-fence buyer.

It has been three months since you listed your home, and you have yet to receive any offers. You add a $5,000 seller credit to your listing to incentivize buyers. As a result, buyers don’t suspect a price reduction due to a known property issue, as you stand by your initial listing price.

The possibility of saving money on the cost of escrow and loan fees is attractive to buyers. They can invest these savings in new furniture and renovations if they purchase your home.

 

Provide incentives to prospective buyers for a quick sale.

The job you got out-of-state has forced you to sell your home quickly. Your property listing mentions that the house has a one-year home warranty to entice prospective buyers. The warranty will give buyers a sense of security if a foot of water fills up their basement.

It would cover the cost of repairs. Rather than paying for the policy directly, you offer the buyer a seller credit of equal value. You can also use a credit card to provide buyers with protection like flood or natural disaster insurance.

 

Incorporate closing costs into the buyer’s mortgage.

Despite having a buyer eager to purchase your property, they can only come up with the closing cash if your property is high on their budget.

By increasing the price of your sale and giving the buyer a portion of the credits, you can reduce the amount of cash that a buyer will need to close. The buyer will roll over closing costs into their loan, and you will walk away with the same profit.

 

Here Are Some Numbers To Demonstrate How This Works:

When a buyer puts down $60,000 (20%) and finances the rest with a mortgage, they need to bring $69,000 at closing, which includes their $60,000 down payment plus $9,000 closing costs (3%).

Given the buyer’s cash reserves, you offer the buyer $9,000 in seller credits to apply to closing costs in exchange for a $309,000 sale price.

By working this out, you will still walk away with $300,000. On the other hand, the buyer will owe only $62,070 at closing, a $6,930 reduction from the amount they initially needed.

$61,800 (20% down payment) + $9,270 (3% closing costs) – $9,000 (seller credits) = $62,070

 

Mortgage Lenders Set A Seller’s Credit Limit.

Sellers can get credit, but lenders set limits. A conventional mortgage is eligible for closing cost credits or “interested party contributions” up to the following amounts:

  • The maximum down payment for a primary or secondary home is 3%.
  • When a buyer puts down 10%-25%, the maximum is 6%.
  • For buyers who put down 25% or more on a primary or secondary home, the maximum is 9%.
  • Any investment property with a down payment of 2% is eligible.

There are also limits on seller credits on government-insured mortgages:

  • It’s a common misconception that sellers can contribute to a buyer’s down payment, but that is not true. FHA-guaranteed mortgages limit sellers from contributing more than 6% of the purchase price without affecting the loan amount.
  • A seller concession cannot exceed 4% of a home loan’s total amount. Mortgage discount points also do not qualify for seller concessions.
  • The maximum seller contribution for USDA loans is 6% of the sale price.

 

Does Seller Credit Benefit Anyone?

It’s important to remember that seller credits benefit both the seller and the buyer.

It may be a good idea to use a seller credit to increase the value of your home without lowering your list price if you need help selling it. Additionally, they are an excellent tool for speeding up the sale of your home if you’re on a tight schedule, and they help offset additional repair costs that arise after an inspection.

It’s important to note that seller credits can also be a hassle. In the case of a seller’s market, offering a seller credit will just complicate the process. In these instances, you are better off allowing buyers to compete.

 

Summary

What is seller credit? The seller agrees to pay the buyer’s closing costs as part of the seller credit (seller concession). Buyers can purchase their homes while mitigating the additional costs at settlement. This is often a win-win situation for both the seller and the buyer.

The best thing you can do is work with your real estate agent to determine if this would be a good fit for you and if any homes with seller credits are on the market.

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