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Understanding the Risks and Benefits of Closing Cost Credits

real estate lawyer moorestown njWhether you are selling your home or looking to buy, it is likely that you will want some clarification regarding a useful but poorly understood tool: the seller assist (a/k/a closing costs concessions, seller credit, or seller’s assist). This tool can benefit either party in the transaction, but also presents risks that should be carefully considered.

From the Seller’s point of view, a request for a seller credit may seem like a request to give up some of the sale price. That is not the case. In fact, the credit is more accurately seen as allowing the Buyer to obtain additional financing for the home. The way it works is that you sell your home for the amount that equals your bottom line (let’s say, $190,000.00), plus some additional amount that the market can bear (let’s say $5,000.00); but, you provide a $5,000.00 seller assist. In this way, you are obtaining your bottom line while allowing for the Buyer to finance an additional $5,000.00, which effectively allows you to accept an offer from a Buyer who might not otherwise be able to purchase your home.

The benefits to the Buyer are of course more obvious. Not only does a seller credit allow for the Buyer to have significantly less to worry about when it comes time to bring a check to the closing table, this tool also essentially allows for additional financing to cover the cost of closing, and can also be used indirectly to cover some or all of the costs of desired upgrades and/or repairs.

Considerations of Seller Assist

There are, however, some important considerations and significant limitations on this tool. The first and most obvious is, the Buyer must consider what limitations are imposed by the lender. A seller assist in a purchase money loan for a primary residence with a deposit of less than 10%, for example, would be capped at 3%, while a seller assist in a FHA loan even at the minimum deposit amount would be capped at 6%. Thus, the type of loan the Buyer will be getting matters when considering whether a seller assist is appropriate, and if so, how much the assist should be for.

Second, it’s important to note that a seller assist is not a tool that can be used for every occasion. For example, a Seller with little equity in their home is unlikely to be able to offer a seller credit. In this situation, there simply isn’t as much room between the bottom line the Seller must get and the price the home can reasonably be listed for.

Another consideration is what signal a seller assist request may send. In some (but not all!) situations, a Buyer requesting a seller assist would be better served by putting additional funds into the down payment. Requesting a seller assist, therefore, may signal that the Buyer’s financial footing is less firm than it might otherwise be, and therefore there is an increased risk of the loan falling through. This does not mean Sellers should categorically reject offers involving a seller assist, but it does mean that Sellers should carefully consider the broader context, including any other offers they may have, other similar and recent transactions, and the state of the real estate market as a whole.

Similarly, Buyers should be careful to avoid the feeling that they are getting “free money” in the exchange. As noted previously, a Buyer is essentially obtaining additional financing by obtaining a seller credit. In addition, a negotiated seller credit may make it more difficult for the Buyer to negotiate additional concessions later in the transaction, such as repair requests.

Ultimately, the wisdom and applicability of the seller credit will depend on market conditions and the particulars of your transaction. As such, it is important to fully explore this option with a real estate professional before moving forward with an offer.

Contact a New Jersey Attorney About Your Real Estate Needs Today!

Do you have questions about closing costs and/or seller’s assist in New Jersey? At Attorneys Hartman, Chartered, we have years of experience helping clients with this very task. Call us anytime at 856-235-0220 or fill out our online contact form to schedule a confidential consultation. Our main office is located at 68 E. Main Street Moorestown, NJ 08057.

The articles on this blog are for informative purposes only and are no substitute for legal advice or an attorney-client relationship. If you are seeking legal advice, please contact our law firm directly.

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