Sellers may pay a buyer's portion of closing costs in most markets. Typically requested by cash-strapped buyers, a seller credit at closing involves negotiating a set amount, usually no more than 6 percent of the sale price, and applying it at settlement through the escrow process. Limitations apply to the amount and fees which the credit covers. The seller credit can benefit both the buyer and seller in a transaction.
The seller credit acts as a strong buyer incentive in markets where inventory outweighs demand, known as a buyer's market. To compete with other sellers, a homeowner may offer a seller credit and include it in his marketing strategy. A home in which the buyer is guaranteed a credit to help with closing costs may appeal more to a buyer who is otherwise hesitant to request or negotiate a credit. Offering to pay all or a portion of the buyer's closing costs indicates a strong motivation to sell, as the seller takes a hit to his bottom line.
Higher Sale Price
Buyers may increase the purchase price to entice a seller to cover their closing costs. Buyers may increase their offer dollar-for-dollar according to the seller credit request. In such cases, the sale price improves; however, the seller's financial take does not. To profit from a closing cost credit, the seller must increase the sale price sufficiently to offset the credit and obtain a higher price than he would have otherwise. Cash-strapped buyers may agree to increase their price substantially if the home can appraise at value and they can obtain the loan for the higher amount. The seller credit indirectly allows them to finance most of their closing costs.
At the end of a transaction, the seller may end up with more money than anticipated. Buyer's who ask for a seller credit at the onset of a transaction may overestimate their closing costs. Because seller credits may cover loan costs, or points, the seller can buy down the buyer's interest rate. In a market of falling rates, the cost of a low interest rate may fall from one day to another, leaving a surplus. A seller may keep the unused portion of the credit at closing if the buyer does not renegotiate in advance. Renegotiation and acceptance of new contract terms during a transaction is voluntary.
The seller credit may be the only way a cash-strapped buyer can purchase the home. Low- and moderate-income buyers who rely on financing may have only enough to cover the down payment, which ranges from 3.5 percent with the Federal Housing Administration to 20 percent with conventional financing. Borrowers with no down payment funds who obtain loans backed by the Department of Veterans Affairs or the Department of Agriculture often need help with closing costs. When capable buyers are scarce, providing a seller credit can mean the difference between selling the home and not.
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