Closing Cost Credit

 

Closing cost credit. Sometimes it's also called a seller credit, but it's something that's often misunderstood and I want to be very clear what it is. So it'll come up a couple of times, typically in the beginning your lender will tell you whether they feel you need it or not. If the lender doesn't feel you have enough cash to cover the closing costs, as well as your down payment and the additional expenses that go along with the purchase of a home, they will say to us, your realtors, this buyer needs a closing cost credit.
Now there are limits in how much you can ask for in a closing cost credit. Typically it's a percentage, but that's also on the lender. So that's their rule. They're going to tell you what you're allowed to ask for or what you need to ask for. And then we as your realtors are going to try to find an option for adding that to a contract. So what the seller is going to see is a higher price and then a reduction of that price in the seller credit, or closing cost credit, or buyer credit or... It's called a lot of different credits. So they're not going to be crazy about it, especially if they're expecting a full price offer.
So let's just use an example where I can easily do the math of a house that costs $100,000 and the lender says you need $3,000 in closing cost credit. So if we go to this house that's listed at $100,000 and we say we want to offer $95,000 but we need a $3,000 credit, there's a couple of ways we can do that. We can make an offer of $95,000 with a $3,000 closing cost credit. That leaves the buyer, I mean the seller, with $92,000. 95 minus 3000, their sale price is actually $92,000, and that's what they're going to be looking at.
The other way to do it is if we say, "Well, we think the house is worth $95,000, we're going to add $3,000 to that and we're going to make an offer of $98,000 with a $3,000 credit." Leaving the seller with a $95,000 net.
Now, the one thing we try really hard not to do is go above the purchase price. We would advise you against offering $103,000 and taking that $3,000 credit. The reason for that is because appraisers often don't like it and won't give us that credit in the purchase price. So an appraiser will say, "If the house is worth $100,000 and that's what they wanted to sell it for, then you don't get to say it's worth 103."
Now, the confusion comes in because the sellers often feel like they're giving you their money. In my opinion, they are not. You're taking a mortgage for that whole higher amount. So in the case of the 98,000 with a $3,000 credit, you're taking a mortgage for $98,000. That $3,000 comes back to you and it goes to paying your costs, or your down payment, or whatever the lender will allow. That's your money. You borrow it essentially from yourself. So all you're doing is offering the seller $95,000, but you're adding an additional amount over it that you are financing, you're paying back to the bank, and then you're using to pay some of your costs.
So that's what a closing cost credit is. Hopefully, that's a little clearer than mud.