Home prices have risen across the country, and in many areas, the hot market has transformed a buyer's haven into 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. For 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 rewind the clock to three years ago for a moment. In 2012 unemployment topped 8%, consumer confidence was bleak, and doom and gloom rattled the housing market. Home buyers were in the driver's seat, and sellers were practically begging for offers. During this time, obtaining seller credits were not only reasonable, but also very common. Banks holding foreclosed inventory would often offer concessions to offload homes to meet year-end goals 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
Buying power is a big factor here. 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 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 costly 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 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 to 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:
It's important to understand that while you can ask for a credit for closing costs, you can also request a reduction in the house price. 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 because it will lower your monthly housing payment. The sky is the limit. You can ask for a credit for closing costs and a reduction in the purchase price, but in most cases it's usually one or the other. Talk to your mortgage and real estate professional about which is the most beneficial for you.
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