What is a Closing Cost Credit?
Dec 19, 2022
Seller credits can be offered by home builders or ordinary home sellers as a way of decreasing the buyer's out-of-pocket closing costs.
As a potential homebuyer, closing cost credits represent a great opportunity to increase the affordability of your new home by creatively buying down your "cash to close" amount.
As a home sellers, you may be aware of Realtor fees and taxes, but you might also be on the hook for a seller credit if one is negotiated and agreed to by both parties.
What is a Closing Cost Contribution?
Closing credits are monetary seller contributions that are negotiated and agreed to by the home seller and can be used to "buy down" your closing costs as the buyer.
What Can Seller Credits Be Used For?
These monetary credits can be applied towards one-time fees or recurring charges. For example, closing cost credits can be used for the following line items:
- Attorney fees
- Title insurance
- Appraisal fees
- Origination fees
- Prorated interest
- Property taxes
- Homeowners insurance
- HOA dues
How Closing Concessions Work for Buyers
First, it's important to remember that as a homebuyer you'll need to come up with the downpayment plus any required closing costs. There are several categories of closing costs that are consistently paid by the homebuyer. It's important to remember that some closing costs may be paid by the seller if negotiated as part of the purchase agreement or a contract amendment.
A closing credit is money the seller gives to the buyer at the time of closing. Take an example of buying a $400,000 house. Let’s assume you are offering the full asking price with a downpayment of 10% ($40,000). In other words, you will be financing the other 90% for a total mortgage of $360,000.
In this scenario above, your total closing "cash to close" amount will be $40,000 plus any additional closing costs from the lender, title company or closing attorney. In general, total buyer closing costs typically add up to about 1-2% of the final purchase price.
If we use 1.5% as an estimate of your closing costs, then your total required cash to buy the home would be $46,000 ($40K plus $6,000 (1.5% of the purchase price).
If you successfully negotiate a $10,000 closing cost credit, your out of pocket cost to buy the home will be reduced to $36,000.
This is the power of closing credits and why they are so helpful, especially to first-time homebuyers.
Price Reduction Versus Seller Credit
There are several ways you can negotiate the terms of your contract and the most obvious way is to offer a lower price on the property you're buying. However, keep in mind that the seller will typically only care about the final net proceeds that they are receiving when the sale is finalized.
Therefore, on a $400,000 sale these two offers will end up netting the seller the same amount at closing:
- $400,000 purchase price and $10,000 in seller concessions
- $390,000 purchase price and $0 in seller concessions
We recommend that you balance what's most important to you. Some buyers want to preserve cash and can take on a slightly higher payment in exchange for the seller contributing a credit. Other buyers want to get as low of a home price as possible in order to build equity faster.
Closing Cost Credit Limitations
- Can not exceed 3% of the purchase price if you have a mortgage.
- Can not exceed total closing costs if you have a mortgage. This tends to be an issue if a builder is offering a large credit that exceeds the closing costs.
- Check with your lender before negotiating closing costs credits.
How to Reduce Closing Costs
As we covered, the closing costs for a seller and the buyer can be quite substantial. As the seller, the best way to reduce closing costs is to negotiate Realtor commissions in order to avoid paying 6% in agent fees.
As a homebuyer, you can work with independent brokerages like SimpleShowing, who offers a 1% closing cost credit in the form of a commission refund.
To find out more about how we’re helping buyers and sellers keep closing costs down, contact us today.