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!

What Homebuyers Need to Know About “Seller Credit”

house lovelyHomebuyers: You can use a seller credit to your advantage. Here are the rules and requirements in short, quick form.

A seller credit or seller contribution is money the seller gives you to pay for closing costs. Some or all of your closing costs, including your property taxes and personal hazard/fire insurance may be paid for by the seller. If the seller pays all your closing costs, you will pay only your down payment.

The seller cannot pay for any of your down payment, per law.

If there is extra money from the seller after all your closing costs are covered, the extra money stays in the seller’s pocket. Homebuyers cannot receive cash from the seller, not even one dollar.

If there is extra money from the seller credit after all your closing costs are covered, ask your loan officer about using that money to buy down your interest rate. If there is enough cash available, you could use it to pay for a point or even a half point (a point is a percentage point, and it is interest paid up front) to get a lower interest rate.

If the seller is paying for your lender fees, then the lender sees no reason to waive or lower any junk fees they may have, because you aren’t paying for them anyway.

How to Get a Seller Credit

In order to get a seller credit, you must have it included in your Purchase and Sale Agreement. Therefore, you ask your real estate agent to negotiate it for you. It is part of the price negotiation of the home. The lender does not handle the negotiation of a seller credit.

The seller credit should be stated as a dollar amount, such as “the seller will contribute $5,000 toward the buyer’s closing costs, including prepaids.” Or, the credit can say something like, “The seller will pay all of the buyer’s closing costs, including prepaids, up to $XX maximum.” The credit should not be stated as a percentage. If stated that way, the lender will require an addendum to the purchase contract that states it in an exact dollar amount, which causes more time and hassle later.

(Prepaids = your property taxes, homeowners/hazard/fire insurance, and days of prepaid interest.)

Interesting Strategy You Can Use

When the property inspection report comes in, there will be flaws and needed repairs exposed. This presents a second opportunity for a homebuyer to ask for a seller credit. If the seller doesn’t want to do the repair work, the seller can offer to credit you cash toward your closing costs instead. This preserves your own cash so you can use it to make the repairs after closing. If you are the handyman type who likes to do your own repairs, you might come out financially ahead this way.

The Take-Away: Discuss seller credit with both your real estate agent and your loan officer. Your agent will help you get it and your loan officer will help you use it to your best advantage. Remember, with a purchase loan, you cannot take cash out of the transaction (that is only allowed in a refinance when the borrower already owns the property).