The process of buying investment properties involves several steps. As a real estate investor, it is important that you go through each one in the most efficient way possible. As you surely know, a home inspection is an integral part of the buying process. In some cases, the inspection may reveal problems that could require immediate repairs, which in turn could prompt you to use seller credit to cover the cost.
In this article, we will demystify the concept of seller credit and outline everything you need to know about seller credit to buyer for repairs.
What is Seller Credit?
Naturally, the first thing we should go over is a brief definition of seller credit. In simple terms, this is a form of credit that covers repair costs for the buyer in case the home inspection reveals major issues. In many cases, buyers opt to proceed with the purchase despite adverse findings during the inspection. Credit at closing helps move the deal to the finish line and guarantees that both the seller’s and buyer’s needs are met.
Credit at Closing for Repairs: How Does it Work?
There are various ways in which seller credit is packaged. One of the most common options that sellers use is the inclusion of seller credit in the sale price. In other words, the credit becomes part of the buyer’s mortgage. This allows for a smoother transaction and gives real estate investors and buyers the ability to undertake repairs in a more flexible manner.
In other cases, the seller might handle the repair and pay the contractor a credit. Money can also be held in escrow until the work is completed after which the extra amount will go to the seller.
How Can Investors Use Seller Credit?
Seller credit can be used to cover a host of expenses associated with closing. below is a brief overview of how this credit is used in real estate transactions.
1-Offset Repair Costs
Like we mentioned above, offsetting the costs of repairs flagged by the home inspection is one of the primary uses of seller credit. Examples of issues that your licensed home inspector may uncover include cracks in the driveway, structural damage, and plumbing system clogs.
Since buyers are covered by a contingency, credit that is issued by the seller ensures that the sale will conclude without any hiccups even if major issues are uncovered. As a buyer, you simply need to get a quote from a contractor, and the seller will offer you an equivalent amount as repair credit.
2- Speed Up the Sale
Even without a thorough inspection, the process of purchasing an income property can drag out for weeks. This is even more so the case if major issues are identified. Seller credit helps speed up the sale process by relieving you of the pressure of undertaking the repairs and gives you the confidence to finalize the deal as quickly as possible without worrying about any issues down the line.
3- Include Repair Costs in the Mortgage
Another great thing about receiving a credit from the property owner is the ability to lump repair costs into your mortgage. The seller can simply raise the price of the property while offering you the difference in credit. This will allow you to roll some of your repair costs into your loan while the seller receives the same amount of money.
Frequent Questions Regarding Seller Credit
At this point, you should have a firm grasp of what seller credit entails for buyers and investors. To further clarify this concept, below are detailed answers to some of the frequent questions that buyers and real estate investors ask.
Can You Deduct Seller Credit?
Credit that you receive from the owner is not tax-deductible. Having said that, there are other options that can help buyers reduce their repair costs. For instance, you can agree with the seller to add this expense to the cost basis of their house. An experienced real estate agent can help you negotiate favorable terms during the sale.
Related: Investment Property Tax Deductions When Buying or Selling Real Estate as an Investor
Is It Possible to Use Seller Credit for a Down Payment?
It is not possible to use seller credit for your down payment. In fact, it is illegal for the buyer to receive any cash from the seller directly. Keep in mind that a down payment is a sign of good faith that enables lenders to gauge your ability to service the loan. Using outside funds to make this payment is, therefore, an antithesis to this notion.
Related: What You Need to Know About the Minimum Down Payment for Investment Property
Can the Seller pay for the Repairs at Closing?
Yes, the seller can pay for the repairs directly at closing. This is done either as a lump sum or through an escrow deposit. In this situation, the seller is paying for repair costs out of the profit made from the property sale rather than through issuing credit to the buyer.
Are There Any Limits to Seller Credit?
Yes, there are in fact limits to the credit you can receive when buying an investment property. These limits are placed by the lender and follow several rules that are set by Fannie Mae:
- For buyers who make a down payment of less than 10% on a primary or secondary home, the maximum credit is set at 3%
- For buyers who make a down payment between 10%–25% on a primary or secondary home, the maximum credit is set at 9%
- For investment properties, the maximum credit is set at 2% regardless of the amount of the down payment.
There are also limits when it comes to government-insured mortgages:
- For USDA loans, seller contributions are limited to 6%.
- For VA loans, seller concessions are capped at 4%.
- For FHA-guaranteed mortgages, the limit on credit is set at 6%
Related: What You Need to Know About Investment Property Mortgage Lenders
The Bottom Line
Seller credits provide a convenient solution to property repairs for both the seller and buyer. As long as both parties negotiate in good faith, the sale can proceed in a timely manner and without wasting anyone’s time and resources.
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