Buyers, sellers, and sometimes even real estate agents get confused with how Closing Cost Credits or Sellers Concessions really work. For starters most REALTORS and buyers, at least in the Northeast, refer to them as a Closing Cost Credit. Lately with all the real estate settlement talk they have often been referred to as Sellers Concessions. For the record they are one in the same. They are a great tool to help buyers pay their closing costs and have more money on hand after closing. This is important because buyers often have lots of expenses such as making repairs, upgrades, buying furniture, and more once they complete their home purchase. One common misconception that many sellers have is that these credits or concessions negatively impact the seller’s bottom line. The fact is closing cost credits don’t hurt the seller in any way and sellers should focus on the net number to them. In many ways, they help sellers because many buyers cannot buy without them.
What is considered a closing cost?
Typical closing costs that occur are the following: mortgage origination fees, appraisal, legal fees, title examination fees, lender and owner title insurance, transfer taxes/stamp fees, recording fees, prepaid interest, pre-paid escrow, homeowners insurance, flood insurance, if applicable, and more.
The confusion about closing cost credits
Closing costs will vary depending on the loan type, borrower qualifications when a buyer closes within a month, quarter, or year, and geographic location. Generally speaking, here are the most common:
Buyers:
Some buyers think that they will receive money back at closing that they can walk away with for their own use. That is no longer allowed. All mortgage companies and regulators put a stop to that in 2009. Buyers instead can use this money toward all allowable closing costs such as pre-paid interest, escrows, mortgage fees, title insurance, taxes etc. This enables the buyers to bring less money to the closing table. If the credit covers the entire closing cost amount, then the buyer would only need to bring the down payment to closing.
There is a cap on the allowable amount that a closing credit or sellers’ concession can be. It largely depends on the loan type and the amount of money a buyer is putting down. Below are the limits on closing credits:
- VA– 4% (can cover Funding Fee)
- FHA– 6% (can cover Upfront MIP)
- USDA– 6% (can cover Guarantee Fee)
- Fannie/Freddie: For Primary Residence:
- >90% 3% (most common)
- 75-90% 6% LTV
- 75% or less 9%
- All investment properties 2%
Sellers:
Sellers often think THEY are paying the buyer’s closing costs out of their own pocket and feel strongly that they do not want to do that. Though it may sound that way on the offer, sellers are actually not paying the closing costs. Instead, the offer can be tailored in such a way that a certain dollar amount of what the buyer pays is used to cover their allowable closing costs.
Example of a Typical Closing Cost Credit
| Offer Price | $500,000 |
| Closing Cost Credit | $15,000 |
| Net Sale Price | $485,000 |
*This is an example for illustrative purposes. Closing costs and commission amounts vary. The $15,000 shown above may or may not be enough to cover the closing costs and commissions.
As you can see the Net Sales Price of $485,000 shown above is the number that sellers should care about. These credits often enable the buyer to pay a higher price or possibly buy a home that they may not be able to without the credit. This is why sellers should remain open-minded about them.
Why Closing Cost Credits will become more prevalent
Since the National Real Estate Settlement took effect on August 17th, 2024, more buyers have been opting to pay their agents with some portion or all of the seller’s concession that they receive from the seller. This is just one of the methods that buyers and sellers are using to ensure that their REALTORS are paid in this new environment. Sometimes a concession will be proactively offered by a seller and many times buyers will request it in their offer. An example of how the numbers may work is shown below.
Closing cost credits have been around for a long time, but due to the recent changes in the real estate industry, which largely impact how buyer’s agents are compensated, these credits could likely be a more widely used tool. As illustrated above, the funds are pulled from the offer price and then can go to allowable closing costs including the buyer broker fee. Make sure you’re working with a REALTOR who understands how closing cost credits can benefit both buyers and sellers and help everyone achieve their real estate goals.