If your home inspection came back with a long list of issues, you'll likely ask for a seller's credit for repairs, which is a way for the seller to compensate you monetarily for the repair instead of paying for the repair before closing.
If you're a home buyer and the home inspection revealed problems, your knowledgeable realtor can help you decide if a seller's credit is the right option.
Find out all the facts on seller credits before you agree upon one with the seller.
What is a seller credit to a buyer?
The majority of buyers will put a contingent-upon-inspection clause in the purchase agreement. This allows them to back out of the deal, or renegotiate, should the home inspection reveal serious repairs.
Even if the home inspection reveals issues, the buyer might still want to purchase the house. They could ask for a seller's credit to pay for those repairs. A seller credit to the buyer goes towards buyer's costs at closing. Other times, a seller credit is packaged in with a higher sale price, so the money becomes part of the mortgage, allowing buyers more flexibility to pay for repairs.
Note that a seller's credit is rarely used for minor repairs, which could be done before closing. Buyers may ask the seller to complete repairs or for a price reduction. A seller credit is typically used to cover major mechanical or electrical problems or something like a new roof.
How does a seller credit for repairs work?
There are several ways that a seller's credit can work. In one way, the seller pays some of the buyer's closing costs so the buyer has more of their own money to pay for the repairs. Another way is tagging the seller credit on to the final sales price so the buyer has longer to pay off the cost of the repairs.
The seller could also pay a contractor the credit at closing to ensure that the money is used for repairing the issue. Or, the money can be held in escrow until the work is done, and any leftover funds go back to the seller.
If the seller is pushing for the closing credit to be paid to a contractor, talk to your realtor about how that could work in your situation.
Get the best deal possible at closing.
A Clever Partner Agent can negotiate seller credits on your behalf.
Can seller credits be used for any repair?
Yes, seller credits can be used for any issue that's found during the home inspection, but it's unlikely that a seller will want to issue a credit for a minor repair. Seller credits are typically used for repairs like:
- Roofing repair or replacement
- HVAC system replacements
- Plumbing issues
- Electrical problems
- Pest control
- Radon mitigation
These repairs can take time, and sellers are more incentivized to offer a credit for repairing or replacing a roof instead of finding and booking a roofer and hoping they finish the job before closing, to name one example. If the repair is relatively quick and simple, then you can request the seller arrange for the repair beofre closing.
Can seller credit be used for a down payment?
No, it cannot. By law, a buyer can't receive any cash from the seller directly. Your lender uses your down payment as a gauge of your ability to afford the house and will require that you have this cash on hand to qualify for a mortgage. If you're using funds that aren't your own, the seller is essentially subsidizing the sale.
What else can a seller credit be used for?
A seller credit can be used to cover some or all of closing costs. In the purchase agreement, they may be referred to as "concessions" or "prepaids," which means homeowner's insurance, property taxes, and days of prepaid interest to your lender.
Note: A seller is more likely to make this concession in a buyer's market.
A seller credit can be used to pay for repairs, but if the repairs come to less than expected, the buyer isn't allowed to keep the extra cash. You might have to give the money back to the seller or see if you could use it to purchase points from your lender.
Your purchase agreement should contain language specifying what the seller credit will be used for, along with an exact dollar amount. An experienced real estate agent will know how to write up the agreement to protect your interests.
Can the seller pay for repairs at closing?
Yes, unless the seller paid for any minor work before the closing, the repairs are paid for at the closing. The seller either gives the money to the buyer in a lump sum or it's placed in escrow.
This is because the seller isn't giving the credit out of their own pocket, but rather out their profit on the home sale.
When should you ask for a seller credit?
First, wait until you get the home inspected before asking for any seller credit for repairs. This way, you'll have a better idea of what needs to be repaired, how extensive the issue is, and how much it will cost. Plus, if there's more than one item on the repair list, you can negotiate all of them at once.
That said, don't wait too long to ask for a seller credit. You'll typically have a set amount of time (typically about a week) to ask for and negotiate seller repairs or seller repair credits after the home inspection.
Will a seller credit change the purchase price of the house?
It depends on the type of seller credit negotiated. If the seller pays for the repair themselves, or from the proceeds they receive at closing, then the purchase price of the home should not be affected.
However, the seller might offer to lower the purchase price of the house to accommodate repairs, which would be considered a price reduction instead of a seller credit. Or you might agree to add the seller credit to the purchase price of the home, and then the seller would give the buyer the money for the repair at closing.
How are seller credits for repairs negotiated?
After the home inspection, buyers will get a full report from the inspector about any issues found with the home and can talk with their agent about whether they want to request any repairs or a seller credit.
Then the buyer's agent will reach out to the seller's agent, let them know that a repair credit is being requested, and open negotiations about the credit. Some variables that might affect the negotiation include:
- How incentivized the seller is to sell the house quickly
- How much credit is being asked for or offered
- Market conditions: Sellers are more likely to concede to repairs in a buyer's market
- The buyer's mortgage loan, if applicable
Different mortgages put different limits on how much a seller can contribute to closing costs in lieu of repairs, so talk to your agent about what's feasible in your specific situation.
Is a seller credit tax deductible?
No, a seller credit isn't tax deductible. What a seller can do is add them to the cost basis of their house to reduce their profit should it be large enough to qualify for capital gains. This won't be a bargaining chip if you're a buyer trying to if you're a buyer trying to negotiate a credit with a seller.
The home seller doesn't have to agree to give you a seller's credit for repairs, and you might have to decide if you're still willing to buy the house. Luckily, if you work with a Clever Partner Agent, you could receive Clever Cash Back to offset repair costs.
Qualifying buyers can receive a check for a portion of the purchase price of their house. To find out more, reach out today.
