Sellers may pay a buyer's portion of closing costs in most markets. Typically requested by cash-strapped buyers, a seller credit at closing involves negotiating a set amount, usually no more than 6 percent of the sale price, and applying it at settlement through the escrow process. Limitations apply to the amount and fees which the credit covers. The seller credit can benefit both the buyer and seller in a transaction.
Some of the benefits of the seller paying the buyer's closing costs include the ability to negotiate a higher sales price, more incentive for the buyer to choose that home above another and the possibility of a surplus.
It Creates Buyer Incentive
The seller credit acts as a strong buyer incentive in markets where inventory outweighs demand, known as a buyer's market. To compete with other sellers, a homeowner may offer a seller credit and include it in his marketing strategy. A home in which the buyer is guaranteed a credit to help with closing costs may appeal more to a buyer who is otherwise hesitant to request or negotiate a credit. Offering to pay all or a portion of the buyer's closing costs indicates a strong motivation to sell, as the seller takes a hit to his bottom line.
You Can Negotiate a Higher Sales Price
Buyers may increase the purchase price to entice a seller to cover their closing costs. Buyers may increase their offer dollar-for-dollar according to the seller credit request. In such cases, the sale price improves; however, the seller's financial take does not.
To profit from a closing cost credit, the seller must increase the sale price sufficiently to offset the credit and obtain a higher price than he would have otherwise. Cash-strapped buyers may agree to increase their price substantially if the home can appraise at value and they can obtain the loan for the higher amount. The seller credit indirectly allows them to finance most of their closing costs.
There's a Surplus Possibility
At the end of a transaction, the seller may end up with more money than anticipated. Buyer's who ask for a seller credit at the onset of a transaction may overestimate their closing costs. Because seller credits may cover loan costs, or points, the seller can buy down the buyer's interest rate.
In a market of falling rates, the cost of a low interest rate may fall from one day to another, leaving a surplus. A seller may keep the unused portion of the credit at closing if the buyer does not renegotiate in advance. Renegotiation and acceptance of new contract terms during a transaction is voluntary.
The seller credit may be the only way a cash-strapped buyer can purchase the home. Low- and moderate-income buyers who rely on financing may have only enough to cover the down payment, which ranges from 3.5 percent with the Federal Housing Administration to 20 percent with conventional financing.
Borrowers with no down payment funds who obtain loans backed by the Department of Veterans Affairs or the Department of Agriculture often need help with closing costs. When capable buyers are scarce, providing a seller credit can mean the difference between selling the home and not.
- Redfin: What is a Buyer's Market?
- Bankrate.com: 5 Mortgages That Require no Down Payment or a Small One
- Fearless Homebuyer: Getting the Seller to Pay Closing Costs
- The Mortgage Reports: Should I Pay the Buyer's Closing Costs?
- Realtor.com: How Much Are Closing Costs? Plus: How To Reduce Closing Costs
- Consumer Financial Protection Bureau. "What Fees or Charges Are Paid When Closing on a Mortgage and Who Pays Them?" Accessed April 5, 2020.
- Department of Housing and Urban Development. "Let FHA Loans Help You." Accessed April 5, 2020.
- Department of Veterans Affairs. "Ten Things Most Veterans Don't Know About V.A. Loans." Accessed April 5, 2020.
- Consumer Action. "You Can Buy a Home," Page 1. Accessed April 5, 2020.
- Consumer Financial Protection Bureau. "Is There Such a Thing as a No-Cost or No-Closing Loan or Refinancing? Accessed April 5, 2020.
- U.S. News and World Report. "How Do Seller Concessions Work?" Accessed April 5, 2020.
- Nolo. "Escrow and Your Role as Home Seller." Accessed April 5, 2020.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.