A little help with closing costs doesn't hurt when you're buying a home, especially when the seller covers a handsome portion of that expense. Sellers can make concessions to their buyers as an incentive to close quickly or to reach a specific sale price. When a buyer gets credit at closing, it means that the seller or, in certain cases, another party has contributed money to cover buyer fees.
When a buyer gets a credit at closing, it means that the seller has agreed to contribute funds to help the buyer pay their closing costs.
The Breakdown of the Sale
A real estate sales transaction culminates with a formal closing, or settlement. A neutral third party, usually an escrow agent, settles all costs incurred by the buyer and seller throughout the transaction. The escrow holder breaks down and itemizes both sides' final fees and payments and the exact amounts of these on a document known as the HUD-1 Settlement Statement developed by the Department of Housing and Urban Development. The HUD-1 also specifies to whom each debit or credit belongs.
Respect the RESPA
The Real Estate Settlement and Procedures Act, which governs residential real estate closings, prohibits parties from giving buyers money outside of the transaction. The HUD-1 must reflect all credits given to a buyer; monetary concessions are viewed as inducements to buy unless disclosed on the settlement statement. For example, under RESPA, it is illegal for a homebuilder to send you a check as a "closing gift," but it can credit you a lump sum through escrow to cover your closing costs.
Giving Credit Where It's Due
The HUD-1 has two columns, one for the buyer and one for the seller. When a seller pays for more than one of the buyer's fees, the HUD-1 reflects the credit as a lump sum. For example, a credit of $2,000 for the buyer's closing costs appears as a single $2,000 credit in the buyer's column and a $2,000 debit in the seller's column. On the other hand, if the seller agreed only to credit the buyer $250 for a home inspection, the escrow holder may itemize the credit on the line designated for the home inspection fee.
The Bottom Line
When a seller credits a buyer, he must either bring the money to the closing table or pay for the credit out of his net proceeds from the sale. Because a buyer credit affects the seller's bottom line, a seller may try to negotiate a higher sale price to offset the cost. Buyers can also take a higher interest rate in exchange for a credit from their mortgage lender. A lender credit is known as premium pricing. Most lenders limit the amount a seller can credit the buyer to no more than 6 percent, but this cap has no bearing on lender premium pricing.
- HUD: Handbook 4155.1: Chapter 5: Section A: Settlement Requirements
- Max Real Estate Exposure: What Are Closing Cost Credits in a Real Estate Offer
- Fannie Mae: B3-4.1-03: Types of Interested Party Contributions (IPCs) (03/29/2016)
- 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.