The process of buying a home is a long, exciting, and sometimes complicated one. Inevitably, during the homebuying (or selling) process, something won’t go according to plan. What if your new home needs a new roof? Or has a major electrical problem? That’s where seller credits for repairs come in. Instead of paying for the repairs directly, sellers may offer a credit to cover the cost of the repairs, so you can coordinate them once you assume ownership.
One of the many checkpoints during the homebuying process is the inspection. During the home inspection, an inspector will evaluate the inside and outside of the home. They’ll ensure everything from the appliances to the foundation is in safe, working order.
If the inspector finds major issues in your new house, you may be inclined to back out of the deal (especially if you included an inspection contingency in your purchase agreement). However, there are a lot of reasons you’d want to stay. You already chose this house for a reason, right? One way to hold the deal together, and keep both parties happy, is for the seller to provide a credit to cover the costs of the repairs.
Seller credits for repairs, which are a form of seller assists, are almost always issued as “closing credits.” When this happens, the seller covers a portion of the closing costs up to the amount of the repairs. Doing so allows the buyer to use the money they would have used for closing costs for the repairs instead.
Seller credits can come directly from the seller’s pocket or they can be tacked on to the final cost of the home. If the seller is paying for the credit themselves, they’ll either pay the contractor for the work or take a portion of the proceeds from the home and give it to the homebuyer.
Seller credits can also be added to the sales price. For example, if the home costs $400,000, but the seller credits for repairs are $10,000, the home price will become $410,000. The sellers will use the $10,000 they receive from the lender to cover the repairs or part of the closing costs. It's important to note that seller credits are not tax deductible as closing costs.
Yes, seller credits for repairs can be used for any type of repair. However, they are almost always used for large repairs, like roof work or mechanical fixes. Sellers are more likely to handle small repairs on their own before closing, rather than having to go through the process of issuing a credit.
Even if the repair is large, if it is a safety concern (like mold or structural damage), the seller will likely make the necessary repairs on their own prior to closing. Otherwise, they could lose the buyer or risk the lender not approving the mortgage.
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The ideal time to ask for, or offer, a seller credit is when the inspection results come back. However, some sellers will use the fact that they’re willing to provide credits to market their home upfront (especially in a strong buyer’s market).
Inspections are typically one of the last steps before closing, so both the buyer and seller will be incentivized to try to make the deal work, even if there are repair requests. It’s also common to renegotiate the sale after the inspection, making it the most appropriate time to discuss credits. Plus, once you know the extent of any damage, you’ll be able to better estimate how much the repairs will cost, so the amount of credit can be determined accurately.
Seller credits sometimes affect the final purchase price of a home, but not always. If the seller provides the credit directly from their own pocket or from the proceeds of the house, the price isn't affected.
However, if the credit is added to the purchase price of the home, it technically sells for a higher amount (the agreed-upon offer price + the credit = the new home price). In this case, once the seller receives the money from the lender, they give the buyer the seller credits for closing costs and/or repairs. While this technically doesn’t reduce the buyer's cost in the long run, it does give them much longer to pay off the cost of the repairs (since they’re embedded in their monthly mortgage). This scenario is more likely in a seller’s market since the seller will have an upper hand when negotiating seller credits.
Although it is less common, the seller may agree to reduce the overall purchase price in the amount of the repairs. This is considered a price reduction rather than a seller credit.
The seller credits for repairs amount and scope are directly related to the results of the home inspection. Seller credits are typically equal to the amount needed for the repair, however, a few factors can affect the negotiation.
The seller is not obligated by law to make any repairs or provide any credit, so unless they are incentivized to sell the home quickly, they may try to negotiate for a lower amount. Additionally, there are limits to how much money a seller can contribute toward closing costs, which can cap the amount of credit they are allowed to offer. The limit depends on the type of mortgage but typically falls between 4% and 6% of the home price (this drops to 2% for an investment property).
Market conditions will also affect the seller credits for repairs scope and amount. When there aren’t many buyers and a large supply of houses, the seller is more likely to agree to give the buyer the full amount. Alternatively, if homes are in high demand and supply is low, a credit may not be offered at all.
It’s important to remember that nearly every deal includes some kind of seller credit or concession, so you shouldn’t be afraid to ask. However, your real estate agent will have expertise in your area, so they can guide you through the seller credits for repairs negotiation based on the market conditions near you.
While seller credits for repairs are largely positive for both parties since they help close the deal and provide cash for repairs, there are some drawbacks.
Since seller credits can affect the home price, they also impact any other costs that are based on the home price. For example, since closing costs and realtor fees are a percentage of a home’s sales price, they increase when the home price does.
Adding seller credits to the home price will also increase your monthly mortgage, although it usually isn’t by a large amount. It’s also possible that the lender won’t approve the higher home price if it differs from the appraisal.
Here’s an example: Let’s say a house is listed for $400,000, but the inspection shows damage to an area of the home. The buyer requests $10,000 to cover the needed repairs and the seller agrees to provide the credit at closing.
To do so, the buyer and seller agree to increase the cost of the home to $410,000 so that the seller can provide the $10,000 from the money they receive from the lender. It’s possible that the appraisal will still come back at $400,000, so the lender may not approve the new price of $410,000. In this case, the seller may offer to cover the $10,000 out of pocket. Even if there are no issues with the appraisal or loan, the buyer and seller will still have to pay the closing costs and realtor fees on the $410,000.
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