What Happens to the Money When You Can’t Use All of the Seller Credit?

You’re buying a house. Your purchase contract says the seller is giving you $7,000 credit toward closing costs. But your total closing costs are only $6,000. What happens to that extra grand?

Can you get the cash at closing? That would sure come in handy, right?

Sad to say, no. The Buyer cannot receive any cash from the Seller.

Some loan officers have let the extra cash stay with the Seller. But how is that fair? Part of your contractual agreement for buying the house for a certain dollar amount was that you would receive $7K.

Can you then reduce the price of the house by $1,000? Not really, because at this point in the process, it isn’t practical. You would surely close late, miss your interest rate lock and moving date. Plus, the appraisal report would need to be amended and new disclosures would be sent. It would create a nightmare in the 11th hour.

Principal Reduction

The easiest, most practical way to use that extra grand without delaying your loan is for the lender to apply it to your principal balance.

This means that at closing, your loan will be $1,000 less than originally planned. You have instant extra equity in your home, which is great. If you have a conventional loan with mortgage insurance, you are that much closer to  having 20 percent equity and getting rid of the monthly MI fee.

If your loan is a fixed rate, the lower loan balance will not change your monthly payment. But, it will change how much you owe. Depending on your loan size and payment, it could cut off a month (more or less) of your term.

Either way, having the Seller pay $1,000 of your mortgage for you is a positive thing!