Guides · Buying
Seller credits in Washington: what they pay for, how much, and when to ask
A seller credit is money the seller agrees, in writing, to put toward your closing costs at escrow. It cannot pay your down payment, and your loan sets the ceiling: 3%, 6% or 9% of the price on a conventional loan depending on how much you put down, and 6% on FHA. After an inspection a credit is usually cleaner than asking the seller to do the work. In Seattle a price cut does nearly the same job and also trims the seller's excise tax.
What a credit is, and what it can pay for#
A seller credit is part of the deal, written into the purchase agreement or into your response to the inspection. At closing, escrow takes it off what you owe and shows it on your Closing Disclosure. The price of the house does not change.
It pays closing costs and prepaids: lender fees, title and escrow charges, recording, and the property taxes and insurance collected in advance. Under Fannie Mae's rules it can also cover homeowners' association dues for up to twelve months after closing.
What it cannot do is fund your down payment, your cash reserves, or the minimum you have to put in yourself. Lenders are strict about that line, which is why a credit only helps if you have closing costs for it to land on.
Sources
- Interested party contributions (B3-4.1-02), Fannie Mae Selling Guide
How much your loan allows#
Washington does not cap seller credits. Your loan does, and the rule depends on the loan type.
Conventional, through Fannie Mae, on a home you will live in: 3% of the price with less than 10% down, 6% with 10% up to 25% down, and 9% with 25% or more down. On an investment property it is 2%. Freddie Mac has its own, similar table.
FHA: up to 6% of the sales price toward your closing costs. VA: closing costs the seller pays are not capped, but seller concessions beyond them are limited to 4% of the home's reasonable value.
Worked at $850,000: with 5% down the conventional ceiling is $25,500, and with 10% down it is $51,000. Above the ceiling the extra does not reach you. The lender treats it as a cut in the price and recalculates your loan on the lower number.
At Seattle prices the ceiling is rarely what stops you. Your actual closing costs are. On a typical Seattle purchase I estimate closing costs at $15,000 to $30,000, and a credit bigger than your real costs cannot come back to you as cash. If what you negotiated is larger than that, take the rest off the price.
Sources
- What costs can a seller or other interested party pay on behalf of the borrower?, HUD, FHA Resource Center
- VA funding fee and loan closing costs, U.S. Department of Veterans Affairs
Not sure how this applies to the house you're looking at?
Talk it through before you writeAfter the inspection: a repair, a credit, or a lower price#
Every inspection finds something. When it is worth negotiating, there are three ways to settle it.
A repair by the seller. The seller hires someone and does the work before closing. It sounds the most complete, and it is the one that goes wrong most often: the seller picks the contractor, the work happens in a rush, and you see the result the week you move in.
A credit. The seller pays toward your closing costs instead, and you hire the contractor you want after closing. Get a bid first, so the number you ask for is a quote rather than a guess. This is the one I usually recommend.
A lower price. The same money comes off the price instead. It lowers your loan rather than your cash at closing, and if the appraisal might come in short, it is the only one of the three that helps with that too.
Some loans, FHA and VA especially, can require specific repairs before closing when the appraiser flags them. A credit does not satisfy those; the work has to be done.
A credit or a price cut, worked for a Seattle house#
Say the inspection turns up $15,000 of work on an $850,000 house, and you are putting 20% down.
Take it as a credit and your cash at closing drops by $15,000, as long as your closing costs are at least that large. The price and the loan stay where they were.
Take it off the price and the house costs $835,000. Your down payment falls by $3,000 and your loan by $12,000, which at a 6.5% fixed rate is about $76 a month for thirty years.
For the seller, the two cost almost the same. Either way they walk away with $15,000 less, except that Washington's excise tax is charged on the price. At this price Seattle's combined marginal rate is 1.78%, so the price cut saves the seller $267 of excise tax that the credit does not. That is a small, real reason a seller might prefer the cut, and worth knowing when you are the one asking.
Which is better for you depends on what you are short of: cash now, or room in the monthly payment.
When to ask, and how#
In the offer, when homes are sitting. A seller whose house has been listed for weeks will often cover some closing costs rather than cut the price, and asking costs you nothing. In a competitive situation, asking for a credit weakens the offer, so save it for the inspection.
After the inspection, with bids in hand. Ask for what the work actually costs, not a round number, and put it in writing in your inspection response.
Tell your lender early. The credit has to fit your loan's limit and your actual costs, and the lender has to see it in the purchase agreement. A credit that appears the week of closing is a closing that slips.
Check the Closing Disclosure. You receive it at least three business days before closing. The seller credit is a line on it; make sure the number matches what you agreed.
If you are the seller#
Offering a credit up front is one of the cheapest ways to widen your pool of buyers when homes are sitting. Plenty of buyers can afford the monthly payment but are short of cash for closing costs.
Offer only what their loan can use. A credit above their limit, or above their actual costs, will not reach them, and it muddies the comparison between offers.
After an inspection a credit is usually simpler for you too. You are not managing contractors while you pack, and nobody comes back after closing unhappy with work you paid for. In Washington you already pay the buyer's standard owner's title policy and usually split escrow; a credit sits on top of those customary costs, so put it on your net sheet before you agree to it.
Common questions#
What can a seller credit be used for?
Closing costs and prepaids: lender fees, title and escrow, recording, and the taxes and insurance collected in advance. Under Fannie Mae's rules, also HOA dues for up to twelve months after closing. Not the down payment or your reserves.
How much can a seller credit a buyer in Washington?
Washington sets no limit; the loan does. Conventional through Fannie Mae: 3%, 6% or 9% of the price depending on the down payment, and 2% on an investment property. FHA: 6%. VA: closing costs are not capped, and concessions beyond them are capped at 4% of reasonable value.
Is a seller credit better than a price reduction?
It depends on what you are short of. A credit saves cash at closing; a price cut lowers the loan and the monthly payment. For a Seattle seller the cut is slightly cheaper, because the excise tax falls with the price.
Can I get a seller credit for repairs?
Yes, and it is often the cleanest way to settle an inspection. The money goes to your closing costs rather than to you in cash, and any repair an FHA or VA appraiser requires still has to be done before closing.
What happens if the credit is more than my closing costs?
The extra cannot come back to you as cash. Your lender will reduce the credit to your actual costs, so take the difference off the price instead.
Does a seller credit change the sale price?
No. The price stays the same and the credit comes off what you owe at closing. That is also why it does nothing for a low appraisal, where a price cut can help.
