Table of Contents
Understanding Seller Tax Credits
Seller tax credits are funds contributed by the seller to the buyer’s side of the deal at settlement. They can be used to cover any fees associated with the sale, including closing costs, repair expenses, etc., depending on the terms of the loan.
This discussion covers:
- A brief introduction to tax credit for sellers
- Seller credit scenarios
- Seller credit limits
Seller Tax Credit Overview
A vendor discount is a type of vendor concession where the vendor gives the buyer money at close to further entice the buyers to buy from them.
Typically closing costs range from 1%-3% of the home’s current market price, so the buyer may be able to save thousands by using a lender who offers a lower rate than others.
It’s important to talk with a realtor before determining whether or not seller credit options will be available for you.
- Who the seller is
- Market conditions
- Demand for the home overall
Let’s discuss the two main reasons for why seller tax credits exist:
Market Conditions
If a hot real-estate (RE) markets doesn’t need seller credits to attract buyers, then they probably don’t need them either.
A slow real estate/downturn may cause some homeowners to offer their own personal credit to speed up the sale of their house.
Who The Seller Is
Remember that this will also depend on who the buyer is. If the buyer needs to move quickly, they might be willing to pay less than if they were looking at buying a house for long term use.
If the seller doesn’t have the patience, capital, and resources needed to hold out for an offer he wants, then he might not be as likely to offer seller credit to entice buyers.
Let’s take a look at how these seller tax credits can be used in practice
Seller Credit Scenarios
Scenario 1: Identifying Issues During the Home Inspection
If you identify any issues during the home inspection, you may be able to offset some of the cost. If the house has been flooded, the inspector will note that the flooding needs to be repaired before the sale closes.
Because of the flood insurance policy, the buyer can offer to pay the sellers for the cost of repairing the flooding up to a certain dollar amount. This helps ensure buyers aren’t concerned about the sale falling through.
Scenario 2: Entice Buyer Who Aren’t 100% Sold on Buying from You
If you want to get rid of your house fast, then you might consider offering a $4,000 discount to the buyer. It’s best if you don’t mention the discount until after they’ve made an offer though.
Scenario 3: If the Seller Wants to Get the Sale Done Quickly
Life has its ups and downs, so whether it’s moving to a new city, having a baby, or graduating from high school, there are things that happen. You may be able to downsize by selling some items, renting out extra rooms, or living with family members.
If you want to offer a home warranty, you could offer buyers a warranty that guarantees them that if anything breaks during their ownership period, they won’t be left entirely out of pocket.
Instead of directly offering a warranty or policy, however, you could offer the buyers a refund of the purchase price at closing. This means they would receive a refund from the sellers even if there was a problem after the warranty had expired.
If Closing Costs Are Included into the Buyers’ Loan, They May be Able to Afford a Larger House
If you’re faced with a situation where the seller has priced their home too high for buyers’ budgets, then one solution is to offer less than the asking price but pay off the difference by using some creative financing tactics.
You basically raise the list price of the house so that buyers can pay for the down payment and close the deal without having to come up with any additional funds right away. To help cover the cost of the transaction, you offer sellers tax credits towards their own expenses.
Here’s an example:
➢ 500K List Price
➢ 515K Offer Price
➢ 3% Seller Tax Credit = 15K in Credits to the buyer
Since you’d be paying $500,000 for the car, the seller would net $500,000 after subtracting the 3%.
We increased the price by 15% to include a 10% discount for sellers who qualify (i.e., they meet our criteria).
These situations often sound too good to be real, but there are options available for buyers and sellers alike to ensure they can reach an agreement. There are some limitations to the number of seller tax credits that can be bought.
Seller Tax Credit Limits
Depending on how much money you’re planning on putting down for a mortgage will determine how much you can get back in credit towards your purchase price.
Conventional Loans and FHA Loans
➢ You can pay between $0-$999 down and get up to 3 percent off the purchase price.
➢ You can pay 10 percent down and get up to six percent seller tax credit.
Veteran Administration Loans
Allow for up to 4% seller credit above all fees (approximately 7% total).
It’s important to remember that the maximum contribution allowed by law cannot be greater than the total cost of the property.
If you purchased a house for $400,000, and the seller contributed $24,000 towards the purchase price, then the buyer would need to pay the remaining $376,000 (the difference between the sale price and the seller’s contribution).
If the total cost for buying and selling the house was $20,000, then $20,000 would be the maximum contribution from the buyer.
Limit Reasoning
Seller credit caps are meant to slow down the rise of house prices by limiting the number of times sellers can sell their houses for free. If seller tax credit caps become too generous, they could actually cause house prices to rise faster than before.
Summary
Closing costs are fees paid by the buyer at settlement. It’s usually a good thing for both parties when sellers sell their homes quickly, and buyers buy them quickly.
You should talk to your real estate agent to see if this is a good match for you. And, when there might be listings with seller tax credits available.
Finance World Direct > Archived > Mortgages
[wp-stealth-ads rows=”2″ mobile-rows=”2″]