How Do Closing Cost Credits (Seller's Concessions) Work
Buyers, sellers, and sometimes even real estate agents get confused with how closing cost credits work.
Closing cost credits are a great tool to help buyers pay their closing costs and have more money after closing. This is important because buyers often have lots of expenses such as making repairs, upgrades, buying furniture, etc. Closing cost credits don’t hurt the seller in any way. In fact, they help sellers because many buyers cannot buy without them.
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How Do Closing Cost Credits Work by Bill Gassett.
If you are selling a home, there is a good chance that you will encounter a buyer that requests a closing cost credit. Your immediate reaction may be irritation. Why, after all, should you pay for the closing costs? But it is important to understand that a closing cost credit doesn’t necessarily mean that you are losing money or paying the buyer for buying your home. It’s just a way for the buyer to have more cash on hand for initial repairs and other necessities after buying. It could also be for just that – the actual closing costs.
Understanding how closing cost credits work, and how they affect your home sale, is necessary in today’s real estate market. This understanding will help you navigate the process of selling your home a little more comfortably, and will allow you to get on with selling your property.
So if there is a request for closing cost credits in an offer for your home don’t freak out! Keep in mind that the only thing that is important is what you are netting on the property. The only focus should be your bottom line.
One other thing worth mentioning is that closing cost credits are also referred to as “seller’s concessions”.
Closing Cost Credits Benefit Buyers And Sellers
So how do closing cost credits benefit me you might be asking yourself? Closing cost credits are designed to give buyers a bit of breathing room right after they purchase a house. Closing on a house can be expensive and can leave buyers with nothing left over to take care of all the things that need taking care of after one becomes a home owner. Additional home buying expenses that come after closing can include upgrades, repairs, purchasing furniture and more. In fact, knowing these expenses are on the horizon can prevent potential buyers from entering the market, and from buying your house.
Closing cost credits are also good for sellers. While at first it may look like you are footing the bill for the buyer’s closing fees, what you are really doing is giving the buyer the opportunity to purchase your home in the first place. This is especially true if you have a house that needs any type of repairs or upgrades to make it desirable. The buyer is going to need some way to bring the home up to standard, and the closing cost credit is one way to accomplish this.
Lets say your home has old stained carpeting that really needs replacement. You figure that it is probably around $5000 for replacement. Your potential buyer when viewing the home immediately recognizes this is something they will need to do. Unfortunately the buyer does not have the funds to purchase your home, pay all of their own closing costs and then upon closing dig into their pocket to come up with another $5000. They structure the offer so that they have funds available to do that carpet replacement everyone agrees should be done. This is a win-win for everyone. You sell your home, the buyer gets the place they want and has the funds needed to spiffy up the place.
Some buyers are under the impression that they can walk with the extra money in the closing cost credit, but this has not been true for several years. All mortgage companies will require that buyers use the money to pay towards closing costs like escrows, pre-paid interest and taxes. The benefit of the credit comes when the buyer needs to bring money to close on the house. If the closing costs are covered by the credit, the buyer only needs to bring the down payment. Of course, closing cost credits may not cover all closing costs, so buyers should get clarification from their Realtor before showing up to the closing with only the down payment. When you consider all the myriad of costs when buying a home it is understandable why buyers often ask for closing cost credits.
The Seller Is Not Really Paying For The Closing Costs
The best way for sellers to look at closing cost credits is as an additional incentive to buy the house. The actual money being paid to the seller is seen once the closing cost credit has been accounted for. For example, if a home is offered for sale at $400,000 and a buyer offers $395,000 with a $5,000 closing cost credit, the seller is actually going to receive $390,000. There is no difference to the seller of the home between the buyer requesting a closing cost credit like this and a buyer offering a straight $390,000.
Now, if you can get a buyer that will offer more money – when you look at the bottom line – then by all means you should consider the offer. But if you want to sell the house and you are happy to sell it for $390,000, there is no reason to get upset by the request for a closing cost credit. Today lots of buyers are asking for closing costs credits. This is very commonplace in real estate sales.
In fact if the buyer is using FHA financing or getting a VA Loan which are extremely popular mortgage products, the chances of a request for a closing cost credit go up exponentially. These loans products are low to no down payment mortgage vehicles. If you live in a rural area the possibility exists a buyer may be using USDA mortgage financing as well. Borrowers getting this type of financing generally have great incomes but don’t have large deposits or funds sitting in reserve. Getting a closing cost credit or seller concession helps them immensely.
Often times sellers askif they should consider this type of financing as if there is some additional risk. The short answer is that’s not the case. There are tons of buyers using these types of loans that are just as qualified if not more than buyers using conventional financing. The key in all situation is to make sure you have a solid pre-approval letter from the potential buyer.
Closing Costs Credit Requests Should Be As Close To The Closing Costs As Possible
There is no real way to determine what the closing costs will be on a home until the day of the closing, because the rates that are used to calculate closing costs vary day by day. Buyers should work with their REALTOR® to determine what they will request as a closing cost credit. If the credit is more than the actual closing costs, the deal could get stalled while the paperwork is rewritten for the deal, or the seller may wind up getting more money than was originally agreed upon.
The best strategy when requesting a closing cost credit is to aim a little below what you expect the closing costs to be, just to stay on the safe side. All buyers should come to the closing with enough money to cover the extra closing costs. As long as you and your REALTOR® have done a good job of estimating the closing costs when requesting the credit, the extra money you pay at closing should not be too much.
Benefits Of A Closing Cost Credit Over A Price Reduction
Buyers should remember that a closing cost credit may actually offer benefits over a price reduction on the home. While a price reduction does allow you to take out less money for your mortgage, it does not give you extra money for fixing up the house or handling any additional costs that may come up after closing.
As a buyer, it is important to think long-term about becoming a home owner. If you expect to need any money for things like repairs or improvements after you purchase the home, you may want to talk to your REALTOR® about a closing cost credit as an option for negotiations during the home buying process.
Closing cost credits are a great way to make real estate sales come together. They are a great tool in making more transactions happen. They should be looked upon favorably by both buyers and sellers. If you are selling a home there is no reason in the world to be upset at a buyer for asking for this kind of concession. Always keep in mind it is your bottom line that matters!
Are There Any Drawbacks For Sellers?
One of the questions you may be thinking about from a sellers perspective is whether there are any drawbacks to a having a closing cost credit or concession in a real estate transaction. There is one potential drawback but it is extremely minor!
Here is one potential drawback for a seller doing a closing cost credit: Appraisal problems. For purposes of making the math easy to understand I am going to use a home selling for $100,000 as an example. Your home is on the market for $100,000 and you fully expect it will sell for full price or a net to you of $100,000.
A buyer comes along and offers you $106,000 but wants $6000 back as a closing cost credit. In real dollars you are netting the exact same amount. No problem right? The issue that you need to make sure you won’t have however is the home not appraising for $106,000. Most of the time this is not an issue but it is something you surely should discuss with your REALTOR®.
In conclusion,giving a monetary concession to a buyer when selling your home is not a bad thing. Keep in mind the goal is to get the most amount of money you can and get your home sold! A closing cost credit can help many homeowners achieve these objectives.
REALTOR®, SRES®, MRP, AHWD
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