A seller credit is an agreed upon amount of money that the seller of a home will credit the buyer at settlement. This amount is negotiated for in a sales contract. The credit is then applied towards the buyers closing costs, prepaids and escrow costs at settlement. In most cases, seller credits can be received and used to cover all purchase costs over and above the purchasers down payment. There are a few situations that limit the amount of the seller credit:
Conventional loan with less than 10% down – seller credit limited to 3% of the sales price
Conventional loan for an investment property – seller credit limited to 2% of the sales price
In some cases the seller credit may only be negotiated for if the purchase price exceeds the current list price of a home. If the seller must net a specific amount, the sales price of the home can be increased to allow the seller to credit the buyer at settlement.
Example: List price -$300,000. Purchase price – $300,000. Seller credit – $0 / List price – $300,000. Purchase price – $305,000. Seller credit to buyer – $5,000.
In this example, the seller will net the exact same amount, but the buyer will need $5,000 less at closing, which can extremely helpful if the buyer is short on available cash. The home would still need to appraiser for the higher price for this option to work out.
A lender credit is very similar to seller credit. The amount of the credit is predetermined at the start of the loan process. The amount of the credit given by the lender is then applied directly towards the buyers closing costs, prepaids, and escrow costs. To be able to offer a lender credit, the lender many times will adjust the offered mortgage rate.
Example: Loan amount – $300,000. Interest rate – 4%. Principal & interest payment – $1432/month. Lender credit – $0. Total closing costs – $10,000.
Loan amount – $300,000. Interest rate – 4.25%. Principal & interest payment – $1475/month. Lender credit – 1.5% ($4,500). Total closing costs – $10,000 less ($4,500) =$5,500.
There is still a cost to offer the lender credit, but in this example, for an extra $43/month on the mortgage payment, the buyer will have $4,500 cash available at the time of the purchase. This is another situation that can make sense if cash is in short supply.
Lender credits and mortgage rates go hand in hand, so different rates on different loan programs will have different available lender credit amounts. Mortgage rates and lender credits will change on a daily basis with day to day market fluctuation.
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