How Do Seller Credits to Buyer Work?

by Lee Grayson

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.

Escrow Credits

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.

Credit Types

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.

Lender Concerns

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.

Credit Release

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.

About the Author

*I have written chapters and articles for Oxford and Harvard University Presses, ABC-CLIO, and others. Arcadia Press published two of my local history texts and I have also written for numerous "article sites," including Pagewise in 2002. My "How to become a...real estate agent" is available as an online text from a Canadian publisher. *I taught writing courses at a branch campus of Indiana University. *I held a California real estate license and have remodeled four of my own homes and advised others on financing homes, repairing credit to qualify for loans, and managing construction (including meeting local, state, and federal regulations for restoration and development grants). *I served as an AmeriCorps*VISTA volunteer and wrote nearly $75,000 in small education grants (under $1,000). *My travels include frequent road trips in Canada, Mexico, U.S., and Europe. I attended school at Cambridge University and used this as a base to explore the UK and Europe.

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