Buying a house is a series of negotiations — everything from the final selling price to home repairs and closing costs. You want to be able to get the best deal every step of the way.
If you’re a home buyer and the home inspection revealed problems, your knowledgable 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 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. The buyer may just ask that the seller have those repairs done or ask 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 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.
Also, the seller can pay a contractor the credit at closing to ensure that the buyer uses the money for its intended purpose. 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 will work in your situation.
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 can a seller credit be used for?
A seller credit can be used to cover some or all of closing costs, though a seller is more likely to make this concession in a buyer’s market. In the purchase agreement, they may be referred to as “prepaids,” which means homeowner’s insurance, property taxes, and days of prepaid interest to your lender.
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.
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 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 aHome Buyer Rebate to help with closing costs. To find out more about working with a Clever Partner Agent, reach out today.