When buying a home, the financial aspects can be overwhelming, and one critical factor that homebuyers should consider is seller credits.
Seller credits, also known as seller concessions or seller contributions, can play a significant role in the home-buying process, impacting both the buyer and the seller. We’ll explore what seller credits are and how they can be treated for a homebuyer.
What are Seller Credits?
Seller credits refer to a sum of money that the seller agrees to contribute towards the buyer’s closing costs or prepaid expenses during the real estate transaction. These credits are typically negotiated during the offer and counteroffer process, and they can vary depending on the seller’s motivation to cooperate and the local market conditions.
Benefits for Homebuyers:
- Reduced Upfront Costs: One of the primary benefits of seller credits for homebuyers is the reduction of upfront costs. Closing costs can add up to a significant amount, and having the seller cover a portion of these expenses can ease the financial burden on the buyer
- Cash Preservation: By using seller credits to cover closing costs, homebuyers can preserve their liquid cash for other essential expenses, such as moving costs, furniture purchases, or any unexpected repairs
Limits on Seller Credits:
There are limits on Seller Credits. Understanding these limits is important to ensure that the seller credits are not underutilized or lost. The main limit is that Seller Credits can not exceed your closing costs. If you have too much seller credit you have a few options to try to use more of it up. Those options include:
- Buying down the interest rate
- Adding an impound account
- Request a Purchase Price Reduction for the unused portion of seller credit
There is a maximum amount of seller credit you can receive on a transaction. The limits apply to any credits from an interested party which includes the seller, real estate agents, builder/developer, or an affiliate who may benefit from the sale of the property and/or the sale of the property at the highest price possible. Depending on the occupancy and Loan-to-Value (LTV), there is a percentage maximum you can receive based on the lesser of the purchase price or appraised value. Below is a table breaking this down for Conventional loans.
|Occupancy||Loan-to-Value (LTV)||Contribution Limit|
|Primary Residence||LTV less than or equal to 75%||9%|
|LTV 75.01% – 90%||6%|
|LTV greater than 90%||3%|
|Second Home||LTV less than or equal to 75%||9%|
|LTV 75.01% – 90%||6%|
|Investment Property||All LTVs||2%|
- FHA loans have a maximum contribution limit of 6%. (primary residence only)
- VA loans have a maximum contribution limit of 4%. (primary residence only)
Seller credits can be a valuable tool for homebuyers, providing financial advantages and facilitating a smoother homebuying process. However, it’s essential for buyers to work closely with their real estate agent and mortgage lender to navigate the intricacies of seller credits and ensure compliance with all regulations.
If you have questions about seller credits and/or interest party contributions, give us a call. One of our Mortgage Loan Originators will be happy to answer your questions and share their experience.