Purchasing a home in Texas is an expensive ordeal. Even if you have a lot of money saved up for the down payment, there are plenty of closing costs, ongoing monthly payments, and even repairs or upgrades that will add to the costs of your purchase.
Seller credit is a negotiation tactic used in many Texas real estate transactions. Essentially, it is a concession by the seller to provide money to the buyer to cover certain costs or reduce the upfront expenses of the transaction. This is a common tactic because there are benefits for both parties involved. Buyers will be able to save more of their money in the beginning while sellers can ensure that the transaction goes through and they can sell the house.
Understanding Seller Credit
A seller credit is a formal agreement between the buyer and seller where the seller provides money to the buyer. This may be a direct payment made to the buyer or it could be the seller agreeing to cover a greater portion of the buyer’s closing costs.
For example, in most cases, buyers and sellers split the actual closing costs of property taxes for the year, but a seller could agree to pay for the full year even if they do not own the property for that entire tax year.
Why Offer a Seller Credit?
There are multiple reasons to offer a seller credit when you are trying to sell your home. First, it can speed up the sale process so that buyers are more likely to say yes and you can move on to the next stage of life. It can also make the property more attractive if your home is in a buyer’s market and you need to get a leg up on other similar homes in the area. In a seller’s market, you may not need to offer seller credits to incentivize buyers.
Additionally, if your home has some needed repairs that you don’t want to take care of yourself, you can offer a repair credit to the buyer so they have the money needed to take care of it themselves while still allowing the sale to go through.
How Seller Credit Works in Texas
Seller credit is a formal process and not just a handshake deal to exchange money between the buyer and seller.
Whether it is being used to cover the buyer’s closing costs or to pay for repairs once they move in, you must incorporate the agreement into the overall home-buying process.
Agreement Between Buyer and Seller
The buyer and seller must come to an agreement about the amount of the seller’s credit. This could involve a negotiation process with the help of a real estate agent as you seek a fair amount that leaves both parties satisfied. Once both parties agree, the final amount must be included in the home purchase agreement for full transparency.
Application to Closing Costs
The next step is to formalize what the seller’s credit is being used for. Will it cover closing costs like lender fees, title insurance, title transfer attorney fees, appraisal fees, or recording fees? Will it cover other prepaid expenses for the buyer such as property taxes or homeowner’s insurance? Laying out what upfront costs the seller is agreeing to cover is an important stage in this process to ensure everything is done by the book.
Lender Approval
Mortgage lenders need to be in the loop when it comes to seller credits. That is because it can affect the total loan amount, which impacts interest, payments, and specific loan terms. Lenders will need to verify that the amount of the seller credit does not exceed the closing costs that it is covering.
Additionally, the type of loan will have an influence on the maximum seller credit that can be included in the purchase. Limits for conventional loans, FHA loans, VA loans, and USDA loans will differ, so seeking lender approval for seller credits is a necessity.
Adjustment at Closing
When the real estate transaction is completed, there will be a settlement statement. There must be documentation of any adjustments to the seller credit amount in this statement. Additionally, seller credits have an impact on the seller’s net proceeds, so this will need to be included in the settlement statement.
Specific Considerations for Texas
Seller credits work differently from state to state, as local governments have various laws surrounding real estate transactions, property tax codes, appraisals, and home loan regulations.
Property Tax Implications
In Texas, property taxes must be split between the buyer and the seller depending on when the closing is and when it falls in the property tax payment calendar. For example, if the closing occurs after the date when these taxes are due, then the seller would pay the full amount of those closing costs. However, the buyer would have to offer credits to the seller to cover the duration of the tax bill in which the buyer will own the home.
If sellers want to incentivize buyers to purchase their homes, they can offer seller credits on the buyer’s portion of the taxes if the closing date is before the tax due date.
Common Closing Costs in Texas
Offering a seller credit for the buyer’s closing costs could cover a wide range of upfront expenses. Common closing costs in Texas include title search, title insurance, home inspection, appraisal fees, survey costs, credit report fees, loan origination fees, loan payoff expenses, and recording fees.
Pros and Cons of Seller Credits
Pros
The advantages of offering seller credits for a home transaction are numerous. First, it provides the buyer with greater financial incentives to purchase that particular home. Second, it gives a competitive edge to sellers in buyer’s markets, even if the trade-off is making a little bit less from the property’s purchase price. However, in some cases, the seller could negotiate for a higher purchase price if they are willing to offer credits for costs like repairs or property tax payments.
Cons
The most glaring disadvantage, if a seller offers these credits, is fewer proceeds from the sales. Another negative is the complicating factors of offering a seller credit which must navigate lender guidelines and limits. If the credit that is agreed on is not of equal value to the closing costs it is covering, there could be further complications that slow down the purchase of a real estate property.
Scenarios Benefiting from Seller Credits
There are times when it makes more sense for prospective buyers and sellers to pursue this tactic. Let’s break down a few of those situations.
High Closing Costs
Buyers who face expensive closing costs may be more likely to move on to another property. With a seller credit on the table, they could have the financial relief needed to go through with the sale. Additionally, closing costs often take buyers by surprise late in the process, so figuring out a seller credit agreement from the get-go could ensure a smoother transaction as the closing date approaches.
Property Issues
For the seller, making repairs can be a hassle as you prepare to sell your home. Ignoring the cost, it could take time to plan a large repair project and ensure it is good enough to pass inspection. Repair credits can be used to cover those repair costs for the buyer so that the seller does not have to worry about them.
Market Conditions
The state of the real estate market can also be a good reason for seller credits. In a seller’s market, buyers are more likely to make concessions when purchasing homes, so sellers may not need to incentivize buyers further with seller credits. However, in a buyer’s market where they have the power, sellers may need to make their properties more appealing than the competition by offering seller concessions.
Buyer’s Loan Approval
If a buyer is unable to get approved for a loan, then the transaction can fall through completely. They might be close to exceeding their borrowing limits to afford the purchase price of the home. In this scenario, a seller credit could be enough to allow the loan to get approved, ensuring that the buyer has the funds needed to cover the sales price and complete the purchase.
Limits and Regulations
Seller credits are not a free-for-all where buyers and sellers can agree on closing costs or tax payments of any amount. There are limitations in place that prevent this tactic from being abused by savvy buyers and sellers.
Loan Type Restrictions
The type of loan the buyer is using to cover the sales price of the home will impact the limits that are in place. For an FHA loan, there is a cap of 6% of the purchase price of the home for seller credits. A USDA loan can include a seller credit of up to 6% of the loan amount rather than the purchase price. Seller credit limits on a conventional loan depend on the down payment. A VA loan can include a seller concession of up to 4% of the price of the home.
Lender Guidelines
Individual lenders will also have different policies on what they will allow for seller credits. It may depend on the down payment, the buyer’s finances, a home inspection contingency, the type of seller credit, and even the time of closing. It is best to consult with the buyer’s mortgage lender as early as possible to figure out what seller credit limits are in place.
Exceeding Closing Costs
Most seller credits are used to cover actual closing costs. However, if the final amount of the closing cost credit exceeds the actual cost in the formal agreement, there are rules against receiving the excess credit as cash back. This means both the buyer and the seller must take careful consideration of the amount they agree on. Depending on the lender involved, it may be possible to buy down the interest rate or down payment with excess credit, though you would need to seek approval.
Conclusion
The tactic of using seller credit is very common in the world of real estate. A buyer and seller can take advantage of this method as a closing cost credit or repair credit, to reduce the down payment, streamline the sale of the home, or make properties more attractive in competitive housing market conditions.
However, before entering a seller credit agreement, it is crucial to understand the limits and complications that come with it. Will the seller be directly paying the buyer to help lower the down payment? Will the seller cover a particular closing cost or offer a repair credit to avoid doing the maintenance work themself? Are these limitations from the lender that would set a maximum seller credit amount?
Seller credits make for smoother transactions in the Texas real estate arena and can benefit both the seller and the buyer. As long as you understand the mechanics and limitations of the seller credit process, you can make the home-buying experience far more positive using this method.
Zach Shelley
Zach Shelley is a seasoned real estate investor with a diverse network spanning across the nation. As the founder of his own real estate venture, Zach is committed to offering innovative solutions to homeowners facing various real estate challenges.. Through his dedication and strategic approach, Zach continues to make a significant impact in the real estate industry, providing homeowners with alternative pathways to navigate their property transactions.
