What is a Seller's Credit?

Question

I am interested in buying a SFH in South Bend, IN, I would like to offer 70k but I can only get a minimum loan amount of 80k (60k loan with 25% down) from a conventional mortgage. The seller is offering a "seller's credit to make it work." What does that mean?

I am looking into a personal loan, but would prefer conventional mortgage because the interest rate will be so much lower.

Andrew Syrios · Answer

Seller's can make a credit to the buyer for closing, but I believe (it's been a while since I checked this, so don't quote me on it) it can only be up to 3%. At that difference, I would look for another lender.

Ariella Sherman · Answer

Got it, thanks. I will look into other sources of funding.

Daniel Thomas · Answer

You guys gave great advice ("get another lender"), but didn't answer the original question.

OP:  A "seller's credit" is when the seller agrees, in writing (usually per an addendum) to contribute a certain dollar amount (or less often based on what I've seen - a certain %) toward the buyer's closing costs.  The problem with a seller's credit in YOUR situation, as pointed out by the responses, is it's only possible to give this much (25%) if the "loan" is "non-conforming."  Conforming loans (I'll spare the details, and leave that portion for a lender to define/respond) have much lower maximums, typically 6%, or less...  TBH, I'm not certain a "seller's credit" (outside the realm of a seller actually financing the deal) is even legal outside conforming parameters at a percentage this high (25%).

Anyways.....  In short, "seller credits" are concessions, paid by sellers at settlement (used to help alleviate the CLOSING COSTS), due to a buyer, that may otherwise prevent said buyer from being able to afford the deal (this is the typical reason, but asking for closing costs isn't limited to "need").

Example:  1) Let's say you're a "conventional" buyer, looking to purchase a home for $100,000.  2) Let's also assume that your lender requires a minimum of 3.5% down payment (which would be $3,500 in this hypothetical).  3) Finally, let's assume that you ONLY have $4,000, maximum, that you can possibly afford to write a check for at settlement.

The $3,500 out-of-pocket minimum requirement for this purchase is NOT the only funds you will have to come up with to close the deal.  You will also have to fund certain "closing costs" associated with the transaction.  Inspections, origination fees, appraisals, surveys, attorney fees, and so on are all examples of "closing costs."  Closing costs typically range in the 2-5% range (where I'm located), which would add anywhere from $2,000-$5,000 to your "due at closing" cash requirements.

...Let's assume that your closing costs will amount to $5,000 for this example...

So, if you're still tracking, you are now (for this $100,000 purchase) on the hook for $3,500 (minimum down payment per your lender), plus an additional $5,000 (for closing costs); totaling $8,500.  Unfortunately, you only have $4,000 cash available; remember?  So you're effectively $4,500 short of making the purchase of this home a reality...  This is where the "seller credit" comes in.  During your negotiations process, your agent was keen to the notion that you would lack necessary funds, so he/she recommended that you ask for $4,500 in "seller credits" to make the deal happen.  Fortunately (in this hypothetical), the seller understood your conundrum, and agreed to pay "up to $4,500" in closing costs, as a "seller's credit" at the closing table...  This "seller credit" was included in the contract, either as a line-item on the "standard contract", or via an addendum.

I hope that makes sense...  I wrote it on the fly, so if there are errors, please excuse the imperfections, but hopefully the message got through....  Good luck your deal!

DT

James Turner · Answer

@Ariella Sherman, I recommend finding another lender as well. I purchased a 2 Unit for 40K using off market marketing in South Bend and got Purdue Federal Credit Union (They have a location in LaPorte, IN) allowed me to get loan with 30% Down with 15 year Term. I did have a preexisting relationship with them with my car loan tho.

Other local banks to South Bend are 1st Source, Notre Dame Federal Credit Union, Teachers Credit Union, AAA Credit Union.

Melvin List · Answer

@Ariella Sherman Find another lender.  That's an overlay and not a conforming guideline