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Seller Credit | Can the seller pay the homebuyer's closing costs?

Jim Quist Jan 3, 2023 12:49:48 PM
Seller closing cost credit. How to get the seller to pay closing costs when buying a home.

Sellers can pay the buyer's closing costs.

It's called a seller or closing costs credit when the sellers of a property agree to credit a sum of money to the buyer at closing time. The buyer can use it to cover closing costs, reducing out-of-pocket expenses associated with purchasing a home. 

Seller credits are negotiable and can be included as part of the terms of the sale if both the buyer and seller agree to them. The specifics depend on the circumstances of the sale.

Because closing costs can be high, negotiating a seller credit helps offset some or all of these costs. It's a valuable tactic, especially for first-time home buyers who want to buy now rather than wait to save enough money for closing costs. 

However, seller credits have limits, and lenders have rules on how you can use them. After reading this article, you'll know the limitations and how to avoid costly mistakes when negotiating credit from sellers.

 

How does a seller closing cost credit work when buying a home?

Ask for a closing cost credit when negotiating the terms of the sale with the sellers. Then, include the amount of the seller credit in the real estate sales contract when making your offer to buy a home. Your real estate agent will help you prepare the sales contract and make an offer to the sellers.

Check out our Sales Contract Explainer.

In exchange for giving you credit, the sellers will want you to pay a higher price for the property. Usually, the amounts of the price increase and the seller credit are about the same. So, for instance, if you ask for $3,000, you should expect to pay $3,000 more for the house.

 

If the sellers would accept $100,000 for the house, and your closing costs are $3,000, offer them $103,000 and ask them to pay your closing costs of $3,000. After paying your closing costs, the seller will still get $100,000 from the sale, and you'll save $3,000. 

If the seller agrees, remember you still pay the closing costs over time by financing them into the loan amount. As a result, your loan increases, making your monthly payment higher.

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When should I ask for a closing cost credit from the seller?

When negotiating, be realistic and consider the seller's perspective. Negotiating a seller's credit may be more difficult in a seller's market, where buyers compete more. However, you’ll have more luck in a buyer’s market when supply exceeds demand, and there are plenty of homes for sale.

Also, consider the condition of the home and any necessary repairs or updates. If the home needs a little work, the seller may be more willing to agree to a seller credit to make the sale more attractive.

Overall, consult with your real estate agent and lender to determine the best time to ask for seller credit and to get guidance on negotiating the terms of the sale.

Get pre-approved

 

What expenses can property sellers pay for home buyers?

The seller can pay some or all of your closing costs. Be sure that your sales contract states that the seller credit is paying the buyer's closing costs. The sales contract includes a section where you or your real estate agent fill in the credit amount.

 

On the Real Estate Purchase and Sale Contract, Section 6, "Closing Cost Credit to Buyer from Seller" reads as follows: "Seller agrees to credit to Buyer at Closing $_________________ OR _______% of Purchase Price ("Closing Cost Credit"), to be applied to prepaid expenses, closing costs or both as lender permits."

 

Closing costs are loan costs and other costs associated with purchasing a home. Loan costs are lender and third-party fees for underwriting, a property appraisal, and title work. Other costs are taxes, government fees, and prepaid items. Check out our Loan Estimate Explainer for more information about closing costs. 

Closing costs can add up to several thousand dollars and vary depending on several factors, most importantly, the location of the property and the lender you choose for the mortgage. Use our Mortgage Calculator to get the details on rates, payments, and closing costs online, 24/7.

Talk to a mortgage expert at NewCastle Home Loans to better understand the costs associated with buying a home and determine how much money you'll need to save to be prepared to make this significant purchase.

Book time to talk

 

Can I use the seller credit for the down payment?

When buying a home, you can't use any portion of a seller closing cost credit for the down payment. 

The down payment is the amount of money you put towards purchasing. It's a crucial part of the home-buying process, as it is a way to demonstrate your commitment to the purchase. You must come up with the money for the down payment and prove to the lender that it came from a legitimate source by providing copies of documents like bank statements and gift letters.

The amount of the down payment required by the lender depends on several factors, mainly the type of mortgage you use to finance your home purchase. For a conventional loan, the minimum down payment is 3%.

The money you need to buy a home, or the cash-to-close, is the sum of the down payment plus the closing costs. 

  • Down payment + Closing costs = Cash-to-close. 

 

Let's say the purchase price is $103,000, your down payment is $3,090 (3% of the purchase price), and the closing costs are $3,000. The most the seller can pay toward your closing costs is $3,000, the actual closing costs. 

Before receiving a seller credit, you needed $6,090 in cash to close.

  • $3,090 (Down payment) + $3,000 (Closing costs) = $6,090 (Cash-to close).

However, the seller credit reduces your cash-to-close by $3,000, so all you need is enough money to cover the down payment, which is $3,090. 

The seller credit can't be more than the actual closing costs. Otherwise, it pays a portion of the down payment, which is not allowed. 

 

Let's say the closing costs are $2,000, and you negotiated a seller credit for $3,000. Unfortunately, you can't use the entire seller credit because it's more than the actual closing costs. In this case, the seller would keep the $1,000 difference, and you'd lose $1,000. 

 

Getting pre-approved for a mortgage is a good idea before negotiating seller credits. When you get pre-approved with NewCastle Home Loans, you'll know the closing costs, so you're ready to deal and won't make costly mistakes. Meanwhile, feel free to use our Mortgage Calculator to get the details on rates, payments, and closing costs online, 24/7, so you know what to expect.

View current rates

 

Can I use a seller credit to pay for repairs or improvements?

Remember, the seller may pay some or all of your closing costs with a seller credit. But lenders won't allow you to use it to pay for repairs or improvements. 

Lenders call credits for repairs and improvements "repair credits" and treat them differently than closing cost credits. The lender will lower the sales price by the amount of the repair credit, not your closing costs. Let me explain further. 

If the home requires repairs or improvements, you and the seller may agree to include a repair credit as part of the terms of the sale to cover the cost of these repairs. However, if the sales contract states that the credit is for repairs or improvements, the lender will reduce the sales price by the amount of the repair credit when calculating your loan amount.

Calling it a repair credit instead of a closing cost credit can be an expensive mistake. 

 

Assuming the purchase price is $103,000, the down payment is $3,090, and the closing costs total $3,000, you and the seller negotiate a repair credit for $3,000 instead of a closing cost credit. 

First, the lender subtracts the repair credit from the sales price to get an adjusted purchase price of $100,000. 

  • $103,000, Purchase price
  • -$3,000, Repair credit
  • =$100,000, Adjusted purchase price

Next, the lender calculates the loan amount from the adjusted purchase price.

  • $100,000 X 97% = $97,000, Loan amount 

The repair credit affects how the lender calculates your loan amount, not the sales contract. So you still have to pay the seller $103,000 for the property, increasing your down payment. To make matters worse, you have to pay the costs too.  

For instance, 

  • $103,000, Sales price
  • - $97,000, Loan amount
  • = $6,000, Down payment
  • + $3,000, Closing costs
  • = $9,000, Cash-to-close 

Book time to talk

 

What should you do when the property needs minor repairs? 

When negotiating a sales price and seller closing cost credit with the seller, consider the condition of the home and any minor repairs. If the house needs a little work, like painting or clean-up, the seller may be willing to agree to a seller credit to make the sale more attractive. 

First, call it a seller closing cost credit, not a repair credit. Next, ensure the seller credit is less than or equal to the closing costs. Then, ask the lender about the property's condition, confirming that it is acceptable. Before closing, the seller must fix defects concerning the property's safety, soundness, or structural integrity.

Get pre-approved

 

What are the lender limits for seller credits?

Lenders limit seller closing cost credits depending on a few factors: the loan type, whether or not you will live in the property, and your down payment.

For a conventional loan, sellers can pay your closing costs up to 3% of the property's purchase price if your down payment is less than 10%. If your down payment is 10% or more, the seller credit increases to 6% of the purchase price. And if putting 25% or more down, the sellers can kick in 9% of the sales price toward closing costs. However, the credit may not be more than the actual closing costs.

If your down payment is... Then you can get a seller credit...
Less than 10% Up to 3%
10% or more Up to 6%
25% or more Up to 9%

 

For an FHA or USDA loan, the seller can pay up to 6% of your closing costs. For a VA loan, the seller can pay up to 4% of your closing costs. In addition, the seller can contribute unlimited funds for things like discount points, origination costs, survey, appraisal, and credit report fees.

Also, the appraised value limits the seller's credit. When determining the property's value, the lender uses the lesser of the sales price or the appraised value.

 

If the sales price is $103,000 and the appraisal comes in at $100,000, the lender will calculate the loan amount based on the $100,000 appraised value.

 

How do I estimate closing costs?

Estimating the closing costs can be tricky, especially for first-time home buyers. Closing costs depend on several factors you might still need to learn, such as the property location, the sales price, and the lender. 

You might have heard to estimate closing costs between 2% and 5% of the loan amount. But it would be best if you didn't plan to buy a home using this method because you need a more accurate estimate. For instance, the difference between 2% and 5% of a $400,000 loan is $12,000! 

We made it much easier for you to estimate your closing costs with our closing cost calculator. 

  • View closing costs based on current rates as you shop for a home.
  • Get accurate information in real time so you know what to expect.
  • Then, feel confident when negotiating with the seller.

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When should I ask for a closing cost credit from the home sellers?

Whether or not the seller accepts your offer depends on the real estate market, the property, and the seller. 

When negotiating, be realistic and consider the seller's perspective. For example, dealing with sellers may be more difficult when both demand and home prices are higher. On the other hand, you'll have more luck in a buyer's market when supply exceeds demand and plenty of homes are for sale.

Overall, consult with your real estate agent and lender to determine the best time to ask for seller credit and to get guidance on negotiating the terms of the sale.

Book time to talk

 

Jim Quist NewCastle Home Loans
JIM QUIST
President and Founder of NewCastle Home Loans. Jim has been in the mortgage business for 20+ years.

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