While researching the home sales process, you’ve likely come across the term “seller credit.” A seller credit is a type of seller concession where the seller offers the buyer money at closing to sweeten the deal. Buyers appreciate seller credits since these essentially discount their closing costs which are typically between 2% and 5% of the home’s purchase price.
As a seller, there are several scenarios where you may offer a seller credit to incentivize offers or move a deal forward. We’ll fill you in on how seller credits work and walk you through situations where these credits may play in your favor. For added insight on using credits wisely, we consulted top real estate agent Topher Kauffman, who has closed 82% more single-family home sales than the average agent in Summerville, South Carolina.
Seller credits are money the seller gives the buyer at closing
A seller credit is money that the seller gives the buyer at closing as an incentive to purchase a property. The credits may subsidize a buyer’s out-of-pocket closing costs, cover the cost of needed repairs, or otherwise sweeten the deal to move the sale forward.
Seller credits are a common home sale negotiation tactic. According to the National Association of Realtors, 46% of sellers offered financial incentives to entice buyers in 2020. Kauffman confirms that seller credits are an important building block of the negotiation process. He estimates that 80% of his transactions involve some type of seller concession.
The prevalence of seller credits varies depending on local market conditions. For example, if you’re selling in a hot seller’s market, you might not need to offer seller credits to move a deal forward, especially if the buyer is competing with other offers.
Examples of seller credits in action
There are many situations where a buyer or seller may negotiate with seller credits to propel the sale forward. Here are some of the most common scenarios:
Scenario 1: Offset the cost of repairs flagged by the home inspection
The home inspection identifies deep cracks in the driveway as a safety hazard. Your buyer asks you to address the problem as part of their inspection negotiations. Since the buyer has written in a home inspection contingency, they can walk away from the sale if you don’t concede to the repair.
You reach out to a contractor who estimates that the repair will cost $1,000 and take between three to six weeks to schedule. You want to close ASAP so you can move your family before the new school year begins. Instead of agreeing to complete the repair, you offer the buyer the equivalent amount in the form of a “repair credit” that you’ll give to them at closing.
Scenario 2: Sweeten the deal for an on-the-fence buyer
You listed your home three months ago and have yet to receive offers. To incentivize buyers, you edit the listing to include a $5,000 seller credit. With this strategy, you stand by your initial listing price, so buyers don’t suspect a price cut due to a known property issue. Meanwhile, buyers are attracted to the prospect of saving on escrow and lender fees. If they purchase your home, they can channel these immediate cash savings into new furniture or remodeling.
Scenario 3: Incentivize prospective buyers for a fast sale
You got a job out-of-state and need to sell your home ASAP. To entice prospective buyers, you share that the home comes with a one-year home warranty in the property listing. This bonus offers buyers peace of mind in case they wake up to a foot of water in the basement. The warranty would kick in to cover the cost of repairs. Instead of directly paying for the policy, you give the buyer a seller credit of equal value at closing.
Scenario 4: Lump closing costs into the buyer’s mortgage
You have a buyer eager to purchase your home. Your property is at the top of the buyer’s budget, and while they can qualify for the mortgage, they’re short on the cash they’ll need for closing.
For a win-win, you raise the sale price and offer the buyer the difference in credits to lower the amount of cash they need at closing. This way, the buyer can roll some of the closing costs into their loan, while you walk away with the same amount of money.
Let’s demonstrate how this works with some numbers:
Say you priced your home at $300,000. Your buyer plans to put down $60,000 (20%) and finance the rest with their mortgage. Between their $60,000 down payment and $9,000 closing costs (3% of the sale), the buyer needs to bring $69,000 in cash at closing.
Since this is a stretch for the buyer’s cash reserves, you offer them $9,000 in seller credits to apply towards closing costs in exchange for raising the sale price to $309,000.
With this arrangement, you still walk away with $300,000. The buyer, on the other hand, now only owes $62,070 at closing — $6,930 less than they initially needed.
$61,800 (20% down payment) + $9,270 (3% in closing costs) – $9,000 (seller credits) = $62,070
*There are a few caveats to this strategy. The home must appraise for the new sale price, and the buyer must qualify for the larger mortgage. The buyer may also pay more money over time with the interest accumulating on the closing costs bundled into their mortgage.
Mortgage lenders place limits on seller credits
Yes, lenders place limits on seller credits.
Fannie Mae set limits on closing cost credits or “interested party contributions” for conventional mortgages as follows:
- 3% max for the buyer who puts less than 10% down on a primary or secondary home.
- 6% max for the buyer who puts down 10%–25% on a primary or secondary home.
- 9% max for the buyer who puts down 25% or more on a primary or secondary home.
- 2% for investment properties with down payments of any amount.
Government-insured mortgages also place limits on seller credits:
- FHA-guaranteed mortgages limit sellers from paying over 6% of the sales price without affecting the FHA loan amount. Buyers can only use credit for interest rate buydowns, discount points, and miscellaneous closing costs; sellers cannot contribute to the buyer’s down payment.
- The VA limits seller concessions to 4% of the total home loan and leaves out some closing cost fees, including mortgage discount points.
- USDA loans cap seller contributions at 6% of the sales price.
Seller credits can create a win-win for sellers and buyers
Seller credits help propel negotiations forward, especially in buyer’s markets where buyers have a wider selection of homes to choose from.
When Kauffman represents sellers, he ensures the seller credit is mutually beneficial for both parties. “It makes sense when the whole package makes sense — for the buyer and the seller.” His approach is to find a middle ground that is fair and balanced for all involved. A seller credit is often part of that equation.
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