Real estate transactions involve give and take on the part of both buyer and seller. Credits give agents a way to handle negotiations so that both sides end up with a contract to complete the transaction. Credits, sometimes called "allowances," from the seller typically give the buyer cash to use during escrow. Some credits allow special considerations such as cash to pay for home repairs. Credits allow sellers to receive a higher price for the property, but the cash rebate also has loan and tax consequences for the real estate transaction.
The escrow company, or title firm in some areas, takes the legal responsibility to follow the directions specified in the sales agreement. Buyers frequently ask for credits from the seller as part of a counter to the original sales offer, although buyers can also ask for credits from the seller in the original offer to buy. The credits don't change the reported sales amount of the property.
Sellers give several types of credits to help buyers. One type offers cash to remedy minor problems with the property. Home inspectors evaluate the overall condition of the property to identify damage and any significant problems that affect the value. When home inspection reports note damage, sellers sometimes give buyers credits to repair or replace the items. Sellers also give buyers credits to pay for non-recurring closing costs such as bank and escrow fees and the buyer's title charges. This extra cash helps pay general escrow fees or allows buyers to pay down loan interest by covering mortgage-interest points.
Banks make loans on properties using the sales contract and the lender requires an appraisal before funding the loan. The appraisal ensures that the property value meets or exceeds the amount of the mortgage. Lenders become concerned when the escrow credits give the buyer cash back on a home. A mortgage with cash credits from the seller essentially gives the buyers cash from the property once escrow closes. Lenders sometimes refuse to fund loans with credits for major property problems and insist the repairs happen before escrow closes. Other lenders set a cap on the amount of credits given by the seller to buyers for escrow and loan costs.
Lenders don't want to take back a home with damage that prevents turning the property around for resale to recoup mortgage losses. Banks frequently require escrow agents to release seller credits only to contractors completing the work on the property, or require the buyer to submit paid receipts to show the completed work. This gives the lender confidence that the property qualifies for the loan even after releasing the cash credits to the buyer. The escrow or title officer closes the transaction and then issues a check to the new buyer or transfers cash into an account for the seller's credits when prepaying for repairs. Credits held for repairs remain in a special escrow account for the buyer to fund repair costs.
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