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What Is A Seller Credit? How To Get The Seller To Pay Your Closing Costs

Certified Mortgage Advisor
NMLS 1701021
Published 
January 17, 2023

Get the Seller to pay your Closing Cost

You can get the seller to pay your closing costs or at least a portion of your closing costs. And this is really helpful because a lot of times people save up for the down payment for their home, but they often forget that they have closing costs.

What is in your Closing cost?

These are things like your appraisal your title, and title insurance. You also have things like recording fees from your county taxes and homeowner's insurance as well.

And so we can actually negotiate for the seller to pay a portion of this, and I wanna show you how it works cuz there are some limitations you need to be aware of. Then I'm gonna show you the math and kind of a hidden trick that you can use that a lot of people aren't aware of.

Pro

So first, real quick per to this is it's less cash outta your pocket. For a lot of people, as homes have been increasing in value, the down payment also increases and it makes it a lot harder to save the money that you need to purchase your home.

Con

The downside to this is it makes your, offer less attractive. Now, this isn't too big of a problem in what's called a Buyer's Market, and we're seeing the market right now transition from being a really strong seller's market into being more neutral to buyer territory.

Buyer's Market

A buyer's market is where buyers have control. You're able to come in with different types of loans that sellers normally maybe would've been hesitant about or different offers that are more in your favor. So things like asking for credits from the seller.

How this works very simply

Let's say we have a purchase price. We're looking at a home that's $425,000. The down payment on this, let's say is $12,750. Okay? Now for closing costs, I'm gonna put in an estimate of 6,500. This is going to change based on where you're at.

Let's talk and get a quote

This is why you really do need to get a quote from a loan officer, and you can do that from us. You can go to Win the House You Love for a consult and look at all your numbers up front.

What we can do to save

Now, what we can then do because we're on the line for these two numbers, 12,750 and $6,500. That would be the money that we have to pay upfront to purchase this home. What we can do though, is we can ask the seller, if can you take 1.5% of the purchase price and give that back to us as seller credit. So in this instance, it would be $6,375 that we could use towards our closing. So then what we do is we take $12,750 plus $6,500 minus $6,375, our seller credit, and that gives us the total that would be due at closing $12,875. That saves us, about $6,300 out of pocket.

Closing Costs

So really quickly, let's cover closing costs. I think this confuses a lot of people because people are used to hearing about the down payment, right? Maybe 3% down on a conventional loan is the minimum. That's what we did in this example right here. So you hear about that. Maybe you hear about 20% to remove mortgage insurance or people have a down payment amount that they're saving towards based on the loan that they're going to be getting.

Closing costs with every lender

What a lot of people forget about or just forget to talk about is the closing costs. And closing costs are on every loan with every lender. Even if you're buying in cash, you still have closing costs.

It's is something that the lender is not charging

Now, unfortunately, there's a lot of marketing around closing costs that can be a little I don't wanna say intentionally deceitful, but it can be a little misleading for a lot of people. Because closing costs often things that the lender isn't charging. So when you get your loan estimate, this is a document you're gonna get that shows you all of your closing costs.

Every lender has to give this to you when you're under contract for a home. And the top left side is where the lender will show you their fees, but then, the rest of the document is all third-party fees. Third-party fees are going to be things like your appraisal. You have a title search of the home and title insurance.

Your county might charge a recording fee. You might have to pay transfer taxes. You're also going to have property taxes. These are likely going to be put into an escrow account. Where the lender pays us on your behalf. Same thing with insurance as well. You'll pay 12 months of your insurance premium upfront, and also insurance put into an escrow account where the lender pays that on your behalf.

No need to walk blindfolded, you can get a QUOTE

So you have closing costs with every lender, every loan type, and people don't budget for this really well, unfortunately, they save for the down payment and then they get surprised by closing costs. And please don't be surprised by closing costs. What you wanna do is get a quote from a lender.

You can get a quote at Win the House You Love. And then you can start to strategize. Can we have the seller pay a portion of that? So two to 3% of the purchase price is usually a good rough estimate. The hard part with closing costs is it's not one fixed number because it's all these different types of people who are charging these costs, right?

It might be the county, it might be your insurance. And what changes here?  Is your insurance may be different than someone else's, maybe because of you have three pit bulls and someone else has no pets, so you're gonna have a higher insurance premium that factors into your closing costs. You also might be in a state with high property taxes, that's going to increase your closing costs as well. So one rough estimate isn't going to be the best. You really do need a quote.

How Closing Costs works

So here's how getting the seller to pay your closing costs works. First, you ask the seller for a dollar amount or a percentage amount at the offer stage. This is before you're under contract for a home. This is when you're shopping for a home.

You're talking with your realtor and you say, I love that house. I wanna write an offer. And then in the offer you can say, I wanna buy the home for $425,000, and I want them to give us 1% as a Seller Credit. This is also called Seller Concessions. Seller credit can be called a couple of different things.

Home and Money

Your agent is then going to help you write that offer. Now, if you would like a referral to a good agent, I work with the top referral network for real estate agents. You can go to Home and Money if you'd like to get connected. So your agent's going to help you write this offer. Then ideally the seller is going to accept and say, that all looks good to us.

And then at closing, you get a credit to offset your closing costs. So this credit then comes from this seller.

Credit Limits

So there are limits to this space on the loan type that you're looking at. With conventional loans, there are several different circumstances. So let's cover FHA, USDA, and VA.

For VA loans, 4% is the maximum. This is again, 4% of the purchase price. With USDA 6% is the maximum, and FHA 6% is the maximum, for a Conventional loan with less than 10% down 3%. Conventional loan, when you're putting 10 to 25% down is 6%. And a conventional loan where you're doing greater than 25%, you can get 9%, and then if you're doing a conventional investment property, 2% is the maximum.

No Cashback

Now, it's really important to note here, you can't get cash back. The Seller Credit can only cover your Closing Costs. It cannot cover your down payment, and it cannot exceed the point where you get cash back from the seller.

Hidden Strategy

How this kind of hidden strategy works, right? Because we talked about one of the big cons to this is that asking for credits makes her offer less attractive and a less attractive offer has a higher likelihood of not being accepted by the seller. When we're submitting an offer to a seller, we want them to accept it.

So we want to give terms that are actually attractive, that they want to accept. All right? So if we put in our offer and the seller won't give a credit when we're negotiating, we can use a strategy to make it easier. So this is how this works.

Demonstration in a spreadsheet

So this is the asking price for the home. Maybe we see it listed online for $400,000. Let's say we're not asking for a seller credit and the seller is going to net $400,000. Now the seller probably still has a mortgage and they have other closing costs that they have to pay. We're not too concerned about that at all.

So if we're doing 3% down, that'd be $12,000. Let's estimate our closing cost to 8,000. And again, no seller credit. So we would have $20,000 due at closing to buy this house. Okay, now I'm gonna get down into the loan amount and stuff like that. Actually, I'll cover it now, let's say on a 30-year loan.

We're looking at, let's say an average six and a half percent interest rate. We'd be looking at a Principal and Interest payment, no taxes or insurance, just Principal and Interest of about $2,400. Now, this is what a lot of people do. They see the home and they say, okay, I'm gonna offer $400,000, and then I'm going to ask for $6,000.

In closing costs. Now what then happens is the seller is going to get $6,000 less. They're going to net $6,000 less. And what does this do? It makes the offer less attractive. Now, you absolutely can do this. There are definitely instances where you come in just at the asking price and you ask for seller concessions, and the seller makes less money and you still win the offer.

That's absolutely a possibility. I just wanna show you from a negotiation perspective how the seller perceives this. Okay? Now, in this. 3% down, again, $12,000, $8,000 closing costs and we got a $6,000 credit. So now we only have to bring $14,000 to the closing table instead of $20,000. So this makes it a lot easier for you to be able to purchase a home.

Now the alternative strategy that we can do here is we can actually wrap closing costs into the purchase price. So we can go to $406,000, ask for $6,000 in credit. So we raised it by the amount that we're asking for. Now the seller is going to net exactly what they said they wanted. And please don't hear me wrong in this.

This is not the only thing that you can do. You absolutely can win an offer just like this. It really is gonna depend on your market and working with an agent who understands your market better, I just want to show you that this is what is happening in the seller's mind when they're looking at your offer.

They don't care that you want 6,000 or need 6,000 or need closing costs. What they want is their bottom line number.  That is ultimately what a seller wants. So if we put in an offer like this and they don't accept it, we can come back and actually say, okay, would you be willing to, raise the price, but just give us that money back.

They still net exactly what they wanted in the beginning, so this doesn't impact them. Now we then have a situation where a down payment, right? We raised the purchase price, so it's slightly higher. Same closing costs, same credit. Now we're bringing $14,180 to the table instead of $14,000. So it raised $180 to get that credit.

Is this a long term strategy?

Now then the question becomes, okay, we wrapped in those closing costs, basically into the purchase price and into the loan. So is this an effective long-term strategy?  Again, if we look at these numbers here, we can look at the loan amounts on each. This one is obviously higher because we raised the purchase price.

So Principal and Interest, these two are the same. This one increases by $37. So we pay $37 more by doing this per month. Okay? Then when we look over five years, this is the interest over five years, is to do this strategy. We paid an extra $1,800 in interest over five years. Now, if we consider that against an average historical appreciation rate of 2% over five years, that $400,000 home then turns into $441,000.

So when you're looking at these options here what a lot of people will do is they'll just. They just keep running to this brick wall of saying, why will no one accept my offer? But they may not be considering what the seller is getting. And then when they look at these options, they might say yeah, but I'm not going to pay an extra $1,800 over five years.

But really what we're looking at with real estate is the opportunity cost of not doing that. Again, I'm not saying this is a strategy you have to do, it just is a strategy that exists and a lot of people use success. , would you pay $1,800 over five years to secure an appreciation of close to $35,000?

Is that something you want to do? To me, that makes mathematical sense to you. It still makes mathematical sense, but it may not be something that you particularly want to do, and if so, that's fine. One note with this strategy is the appraisal must match the increased price, so this only works if our appraisal then is going to come back at$406,000.

Okay? If we offer 406 and it comes in at 400, this strategy will not work. But this is a strategy again, I've seen done time and time again because the seller gets what they want, the buyer gets what they want, and it ends up being a pretty good compromise in between.

Why do it?

A lot of buyers plan for the down payment, but not the closing costs. Can't tell you the amount of times that I've heard stories from buyers where they're like, we didn't even know that closing costs exist,  and yes, they can be just as much as the down payment in some instances.

Allows you to bring money to the closing table

In a buyer's market, it allows you to bring less money to the closing table so you have more money for repairs, maintenance, and an emergency fund.

No trophy for more money down

I see this with a down payment a lot where a lot of people think, oh, I need to put more money down, and somehow there's this like "I win" somehow. There are no stickers. You don't get any awards if we're meeting some arbitrary number. Having money set aside, and making sure that when you buy a house you don't completely drain your checking or your savings account is really the best strategy because things are going to happen.

Your furnace is gonna break down. You might need to change your locks, you're gonna need to paint, you're gonna need to buy new furniture. There are things that happen that you need to have money set aside for in an emergency fund to make sure that if something goes wrong, you don't have to put it on something like a credit card, which is gonna lead you down a pretty rough financial path in the future.

You could also do DPA

Now, you can also do this with any down payment assistance programs. So where your down payment either a portion or all of it could be covered. And you can also use the closing cost credit from the seller for your closing costs.

How to use it

The loan officer is going to apply it, so you're not gonna get like a check for this money. What ends up happening is it's gonna be listed on your loan estimate and your closing disclosure. Your loan officer then is going to put that as a credit in there. Also, this can help pay down again, your closing costs.

Need buy downs? Use it!

You can do temporary or permanent interest rate buy-downs. I have a full video on, 2-1 buy downs or temporary buy-downs. If you wanna watch that.

Yes, it can cover repairs

Then it can also be used as a credit towards repairs. And an invoice can then be listed, so for instance, if something needs to be fixed with, let's say a furnace, then there's an invoice for it that can be put on your settlement statement at the end. And the seller credit can be used to cover that as well.

Not for the down payment

If you have credit left over there are a couple of things that you can do. So maybe we ask, maybe we ask for the full. We asked for 6% seller credits, but your closing costs were not that high. What we can do is either look at adding things on from the seller, like a home warranty.

Maybe that's an offer or maybe something we can get to add in there that, that can be paid for, right? Because we wanna use that money. We don't wanna just give it back to the seller. We could also buy down the interest rate again with a temporary or permanent buy down, or we could just reduce the credit and the price as well, right?

So if we have let's say a thousand dollars left. We can just say, we'll reduce the credit by a thousand dollars and then reduce the purchase price by a thousand dollars if you want to do that. 

Get a full mortgage quote

So three quick steps to make it happen. Number one is please get a full mortgage quote. Don't just go off of 2%, or 3% rules of thumb because you don't wanna just use rules of thumb when you're making an actual accurate plan for your future. Let's run off of actual numbers so we can make realistic plans.

Connect with us!

The best way to get a quote is to reach out to my team. I have a team license in all 50 states. We'd be happy to help. We do free home loan consults at Win the House You Love.

We'll show you all your decision-making numbers up front, and help you qualify for loans so you can move confidently forward when you're buying a home.

Talk to your agent about strategy

Also, then talk to your agent about the strategy. Do you live in a market where this is possible? Are you in a really competitive market? This does not work. Are you in a slower market?

This likely will work. Then talk about the strategy of whether are we gonna come in at the asking price and then the credit. Do we need to make our offer stand out a little bit more? There are tons of different strategies. You can work with your agent to see what's the best way for your deal to work in your market.

Make an offer

And then finally, is to make an offer. So when you're making an offer, your real estate agent is going to write up the contract. With everything that you talked about in there what kind of strategy do you want with your seller credits. So the next video for you to watch is this video on FHA loan requirements.

It's gonna show you everything you need to know about if an FHA loan is right for you.

Ask us a question →
Kyle Andrew Seagraves is Federal Mortgage Loan Originator (NMLS 1701021) licensed in all 50 states with the Dan Frio Team at Allied First Bank (NMLS 203463), an Equal Housing Lender. Separately, Kyle owns Win The House You Love LLC, an education company. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This website is only for educational usage. All calculations should be verified independently. This website is not an offer to lend and should not directly be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate, legal, and/or financial advice.

Servbank is not affiliated with the VA, FHA or any other government agency. This site has not been approved by any government agency.
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