Home prices have risen across the country, and in many areas, the market is so hot that it’s gone from a buyer’s haven to a seller’s market. With that change, buyers may have less leverage than they did during the market’s down years. Despite that, here is how you may still be able to obtain a seller credit for closing costs.
A credit for closing costs involves the seller of the property you’re interested in purchasing receiving less net proceeds in exchange for crediting you monies at closing. Here’s an example. If you’re making an offer to buy a home at $450,000 and you’re asking for a $10,000 closing costs credit your offer is really $440,000 as the additional $10,000 transfers from the seller to you. Also known as a seller concession, a credit for closing gets your foot in the door with less of your own funds needed.
Let’s quickly rewind the clock three years ago for a moment. The year was 2012, unemployment was over 8%, consumer confidence was bleak, and doom and gloom rattled the housing market. Homebuyers were in the driver seat, and sellers were practically begging for offers. During this time, obtaining seller credits were not only reasonable, but very common. Banks holding foreclosed inventory would often offer concessions to offload homes to meet year-end quota expectations for shareholders. Fast forward to 2015, unemployment has dropped significantly, and consumers are feeling more optimistic about their financial health. What can you do now?
How to Get a Seller Concession for Closing Costs
Buying power is a big factor in this. The more house you can qualify for on paper, the more wiggle room you have in supporting a higher price, possibly generating a seller kickback toward your cash to close. Essentially, you are financing the fees by virtue of paying more for the home. If successful, you pay more for the home in these areas:
- Final Sales Price
- Loan Amount
Generally, you will pay less for the house without a seller concession of any kind. This also means your fixed housing costs will be lower in such a scenario, since your mortgage will be smaller.
If you don’t have the cash to get the home, you can debt service the difference with the seller concession strategy, but the cost of that debt servicing can be rather costly both in terms of your monthly payment as well as total interest charges on the life of the loan, especially if funds are tight going in. This is why it is precisely important to be as strong as possible on paper when getting pre-approved. Your credit is a major factor in your borrowing power, and improving your scores even slightly can make a major difference in the loan amount your lender can offer. You can check your credit scores for free on Credit.com to see where you stand.
When Should You Ask for the Concession?
If you want to ask for a seller credit for closing costs, there are two optimal times to make that request:
You can make the request for a seller credit upon submitting your offer with the guidance of your real estate agent. This strategy is more effective on homes with longer days on market (DOM). If a home has been sitting for a while without offers, the price may be too high. It’s generally more difficult to ask for a concession on brand-new listings as other strong offers may be coming in, possibly outbidding yours.
2. After Inspections
Most buyers and sellers are opportune in nature. Each party will attempt to stretch their dollars as far as they will go at the expense of one and other. The buyer wants the best deal on the home while the seller wants the maximum they can obtain for their home. Both objectives are at odds with each other. A seller may be more inclined to pay closing costs than to lower the cost of the home if there’s a “surprise” from the inspection that makes you want to run.
As an informed homebuyer, it’s also important to understand that while you can ask for a credit for closing costs, you can also request a reduction in the house price as well. Say you’re in agreement to buy that $400,000 home, and your appraisal comes in at $385,000. You could ask for a credit for closing costs, but asking to reduce the total price to match the appraised value might be a better approach since it will lower your monthly housing payment. The sky is the limit. You can ask for a credit for closing costs and a reduction of the purchase price, but in most cases is usually one or the other. Talk to your mortgage and real estate professional about which is the most beneficial for you.
More on Mortgages & Homebuying:
- Why You Should Check Your Credit Before Buying a Home
- How to Find & Choose a Mortgage Lender
- How to Get Pre-Approved for a Mortgage