Throughout the process of selling your home, you’ve probably heard the term “seller credit.” As a seller, you may balk at the idea of offering any buyer a credit for your home. But while seller credits may seem irrelevant at first, there is often more to them than meets the eye. You might find that a seller credit can get you the offer you’ve been waiting for.
Read on to learn more about seller credits, and find out if offering one to your buyer is really a good idea.
What is a Seller Credit?
At their most basic, seller credits are money the seller gives to the buyer at closing.
This may seem counterintuitive to the needs of the seller, but in fact, seller credits are actually powerful negotiation tools. In many cases, a seller must introduce an incentive to the buyer in order to guarantee the completion of the sale. Whether it’s to cover the cost of repairs or lessen the blow of closing costs, seller credits can keep the deal from falling through right at the end of the process.
Though you may be unfamiliar with seller costs, they are actually an extremely common negotiation tactic used by homeowners across the country. The National Association of Realtors estimates that around 46% of sellers used financial incentives to entice a buyer in 2020.
Whether or not you’ll need to offer a seller credit depends on several factors, the biggest of these being local market conditions. If you’re in the midst of a seller’s market you may not need to utilize seller credits, as the buyer will likely be competing with other offers.
What Seller Credits Cover
Seller credits essentially cover part or all of the buyer’s closing costs. However, this can vary slightly. As a seller, you may be asked to pay for a specific part of the closing costs, or simply a percentage of the total.
Here are some closing costs your seller credit may be used to cover:
- Property taxes
- Loan origination fees
- Inspection fees
- Title insurance
- Appraisal fee
- Recording fees
- Attorney’s fees
- Cost of repairs
- Mortgage points
When Are Seller Credits Necessary?
As a seller, you may be hesitant to offer a seller credit. However, there are some cases where offering a seller credit can benefit you; mainly in the form of moving the deal forward.
Here are some of the most common scenarios that drive sellers to offer credits to their buyers.
To Offset Costs Repair Costs
Home inspections can often give buyers the upper hand in the negotiation process. No matter how small, necessary repairs may make your buyer hesitate—especially if your deal includes a home inspection contingency that could allow them to walk away.
Unfortunately, simply offering to repair the issues yourself can be a major hassle. From expensive contractor fees to long wait times, you could wind up extending your closing time by weeks, or even months.
For a quicker closing without losing your buyer, a seller credit may be your best option. Rather than agreeing to complete the repairs on your own, you can offer the buyer a repair credit that will be given to them at the time of closing. This way, you can enjoy a simple closing process without the hassle of making repairs.
To Entice a Hesitant Buyer
If your home has been on the market for months without any leads, it’s easy to feel desperate for the process to be over. In these cases, you’ll likely consider dropping the price of your home.
Lowering your listing price can do more harm than good, as prospective buyers may see it as evidence of an issue with your property. Instead, adding a seller credit to the listing price allows you to stand by your initial price while attracting buyers with the idea of saving on closing costs.
If you’re in the middle of a seller’s market, you likely won’t need to introduce a seller credit to entice a buyer, largely because they will most likely be competing with other buyers to purchase your home.
To Assist the Buyer with Closing Costs
So you’ve found a buyer for your home, and their final offer comes in at the top of their budget. While they still qualify for their mortgage, they may be short on cash at closing time.
Luckily, you can keep the deal from falling through with the help of a seller credit. Simply raise the sale price of your home and offer the buyer the difference as a credit. This lowers the amount they’ll need for closing while allowing you to sell your home quickly for the agreed-upon price.
To Speed Up the Closing Process
In some cases, selling your home is a time-sensitive process. Whether you need to be in your new home quickly to start an out-of-state job or want to have your family settled in time for school, you might need to sell your home as quickly as possible.
This is where seller credits come in. To entice buyers quickly, you can add certain incentives to your listing. Things like one-year home warranties, natural disaster insurance or flood insurance can give your home an edge over the others in your area. Rather than directly paying for these policies, simply give the buyer a credit of equal value at closing.
Seller Credit Limits
Seller credits are not without their limits. How much you can offer as the seller will depend largely on the buyer’s loan type.
For example, if your buyer has an FHA loan or a USDA loan, you’ll be able to contribute up to 6% of their loan amount. If they have a conventional loan, the amount you can contribute will depend on the size of their down payment (with a maximum contribution of 9%).
Seller credit limits are enforced mainly to discourage inflation in the housing market. While astronomical credits may make for an easy sale, over time they’ll cause home and rent prices to rise to unsustainable levels.
Seller Credits: The Pros and Cons
When it comes to seller credits, there are advantages and disadvantages to offering them. Whether or not you should offer one will depend largely on your needs as a seller and the state of your local market.
Before you make your decision, here are some of the pros and cons of seller credits.
Advantages of Seller Credits
In a buyer’s market, seller credits can give you a necessary edge over your competition. They’ll also help you overcome barriers such as expensive repairs, making them a powerful negotiation tool.
Seller credits are also useful if you need to sell your home as quickly as possible. They can incentivize buyers to make an offer quickly, and even prevent your deal from falling through if a buyer has trouble paying closing costs.
Disadvantages of Seller Credits
However, there are some disadvantages you should look out for as a seller. Agreeing to raise the home’s sale price and offer a credit may help your buyer save on closing costs, but there is some risk associated with this kind of deal.
If your home does not appraise at a higher value, the buyer may be forced to cover the difference out-of-pocket at closing, effectively negating the benefits of your credit. Additionally, closing fees may fluctuate unexpectedly. If you’ve agreed to pay a percentage of the closing costs, a rise in fees may lead you to pay more than you planned.
Who Really Benefits From Seller Credits?
The bottom line is this: seller credits can benefit both you and the buyer.
If you’re struggling to sell your home it may be a good idea to utilize a seller credit as a way to add value without lowering your listing price. Credits also come in handy when you need to offset additional repair costs that present themselves after an inspection. Plus, they are an easy way to speed up the process of selling your home if you’re working to meet a deadline.
However, seller credits can be a hassle in their own right. If you’re currently experiencing a seller’s market, offering a credit will simply complicate the process of selling your home. In these cases, you’re better off allowing buyers to compete with one another.
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If you’re looking to sell your home fast, there is a way to get the most for it without resorting to seller credits. With iBuyer’s help, you can expose your home to local buyers and investors who are looking to buy quickly.
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