Getting A Seller Credit In Lieu Of Repairs

November 12th, 2012

Getting A Seller Credit In Lieu Of Repairs

It is very common for a buyer and seller to negotiate a seller credit in lieu of repairs after a buyer does a home inspection. Most sellers do not want to bother with doing a small amount of repairs, and some may not have the money until after they go to settlement, so they negotiate a credit and offer to pay some money at settlement for these repairs. The problem comes when the Realtors word this incorrectly in the contract and end up causing last minute problems.

The people that write the rules for mortgage loans, Fannie Mae, Freddie Mac, FHA, and VA, all say that any seller credits can only be credited against closing costs. Period, there is no alternative, there is no wiggle room, no lender from one to the next will have a variance on this. You cannot have a seller credit for:

-carpet allowance
-repairs
-new fence
-furniture allowance
-landscaping
-etc.

The rule makers expect a house to be 100% complete at the time of closing. If there are repairs to be made, they would need to be made prior to settlement. Luckily for homebuyers and Realtors, the rule makers do not require a copy of the home inspection! So how do you get the seller to pay for repairs that you negotiate to be compensated for? You write an addendum that says, “The buyer and seller agree the seller will pay $_____ towards the buyer’s closing costs.” That is it.

An addendum for seller credits cannot mention home inspection, remedy for home inspection, repairs, carpet allowance, etc. ONLY CLOSING COSTS can be paid for by seller credits, but I find many Realtors do not know this, or forget this, and they write into the contract or an addendum that, “the seller agrees to pay $_____ to compensate the buyers for termite damage.” Loan denied, or at least put on hold, until the leaky roof is fixed.

The same logic applies to furniture or items that a buyer and seller negotiate and agree to have the seller leave behind, like a chandelier, pool table, or patio furniture. No consideration can be given in the sales contract for items like this. An underwriter would ask, if they saw language like this, for an addendum agreeing that the items that are conveying are assumed to have no value, and are not part of the sales price. Rather than have this even be an issue, it is probably better to write this into a separate addendum that no one else ever sees except for the buyer and seller.

Schedule a call with me if you’ve got questions about negotiations or a specific situation to discuss.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.​

Tags: , , , ,

Bookmark and Share

30 Responses to “Getting A Seller Credit In Lieu Of Repairs”

  1. Jaime says:

    We currently have a contract on our home, the buyers are VA and we have agreed to 3.5% in closing help. They recently submitted a list of requested repairs based off of the home inspection. We are not in the position to nor do we want to worry about making any of these repairs so we would like to offer the money to the buyers in seller concessions. We would like to offer them 5,000 which is under the 4% cap. Is there a way to make this happen? The closing cost assistance we have already agreed to is totally separate from any seller consessions, correct?

  2. brianm says:

    There is no limit to how much a veteran can receive in concessions towards what is considered customary; however, there is a 4% of the sales price limit on things that are considered outside of what is customary. These would be things like Home Depot gift cards, discount points the on VA Funding Fee, and the payoff of debt, collections, and judgments to help the veteran qualify.

    So to reiterate, the seller may pay all reasonable and customary closing costs and discount points without limit, but the things that are considered non-customary have a 4% limit. The reality is that it’s hard to approach either of these limits anyway. I would talk to the lender, but if you’ve already met the limit of what the seller can pay towards the buyers closing cost the only other solution would be to actually make the repairs prior to closing.

  3. Mary says:

    I have a home in contract that the sellers agreed to do the section 1 termite work on the buyers request for repairs. Because of extenuating circumstances, the sellers don’t have enough time to get it done in time for closing.
    Instead of asking for an extension to close, Can we do an addendum to credit the buyers with the cost at closing?
    Note: this is a 20% down conventional loan and the loan docs and escrow package are already complete.

  4. brianm says:

    If you have not maxed out seller credits already, and as long as you don’t mention the new seller credit is in lieu of termite work, yes, you should be able to do this and close sooner.

  5. Patricia Dragish says:

    I am a buyer in this situation right now. There is an addendum presented to me that will allow me to select the contractors after settlement and the settlement agent will hold funds for dispersement when work is completed. My agent insist that I have contractors give estimates before closing. I do not understand the reason for this, since an amount has been established and agreed upon by Seller and myself. Any information will help me.

  6. brianm says:

    Hello Patricia. I think what they’re setting up for you is an escrow for repairs, not a seller credit. It sounds like they are going to put some money into an escrow account that the title company will hold until the repairs are satisfactorily completed. And then you get to pick contractors and have the work done, and if the work is not done to your satisfaction some/all of the escrow funds would be released to you. This is completely different then a seller credit. You just to be very careful and be confident in your selection of the contractors. Good luck.

  7. Paul says:

    Great article Brian.
    Is a reduction in price of the home in lieu of repairs similar to what you are explaining in your article (i.e. a seller’s credit)?
    Thanks!

  8. brianm says:

    Thanks Paul! Dropping the purchase price is fine, and even a seller credit is fine; you simply have to make sure that you word the addendum such that you’re not mentioning that either the price drop or the seller credit are in lieu of the repairs. You would want to do a simple one sentence addendum such as the below:

    “Seller and buyer agree that a price drop to $___ price has been agreed on, this supersedes any previous agreements.”

    Or, perhaps:

    “Seller and buyer agree that the seller will pay $___ towards the buyers closing costs, this supersedes any previous agreements.”

    You just want to make sure there is never any mention of repairs.

  9. Paul says:

    Brian,
    Thanks for the fast response!

  10. Hannah says:

    I am a first time home buyer. After the inspection, there is a $10,000 repair needed. We signed a mutual acceptance form stating the seller would give “$10,000 credit in lieu of roof repairs.” Our agent told us this is great and that we would have the money to do the repairs ourselves. Well, now we are being told that the money can only go towards our $5,000 in closing cost and we miss out of the other $5,000. We are very upset with this news. Is there something that can be done at this point? Halfway through the closing process. We can’t afford to pay for this roof ourselves at this point. Thank you

  11. brianm says:

    I’m afraid that is correct, and that any seller credit can only go towards closing costs, not repairs. Your realtor really should have known that. What you can do is reduce the seller credit to $5,000, and reduce the purchase price by $5,000. At least that way you would not be leaving $5,000 on the table of a $10,000 seller credit where half of it was not usable. But I know that would put money in your pocket to do the repairs. Or, you can see if the sellers would do the repairs now, and they could pay for them prior to close, or at close, out of the proceeds of the sale? They’d still kick in $10,000 but half of it would be in the form of a $5,000 seller credit, and the other half would be in the form of $5,000 of repairs. I hope that helps. Good luck working it out.

  12. NATHAN DOTY says:

    I still see this come up, there are still agents that say it’s ok. I had one bring it up yesterday, had to tell her no.

  13. JohnB says:

    Great article. Right now I have a deal where seller agreed to give 12k towards closing costs and new HVAC system. It is a 3% max on srllers assist for closing costs. Can I attach a addendum between the HVAC company and seller only, for the remaining 4800 to be pd after closing? Ty

  14. brianm says:

    Hello John. Thank you for the inquiry. I would check with the lender on this, but I think if you could have the seller pay the HVAC company directly at settlement, and then the remainder could go to the buyer as a seller credit, then you should come in well under the 3% Seller closing cost limit. Post back here again with any questions. Good luck.

  15. Cynthia Navarro says:

    We olaced a contract for a mobile home in a permanent foundation. FHA loan. Purchase price total at 170k with 5k seller credit for closing costs. My agent just sent me a multiple counter offer “bring highest and best” and attached the recent pest inspection from the seller needing 10k of work. “Seller prefer not to do any repairs” Now, 170k is my absolute max, max,max, and a seller credit is already included for closing.. Any strategy toward making our offer better and dealing with the pest work. I have listed a 22 day close and short contingencies. What is the max FHA seller credit?

  16. brianm says:

    We don’t do mobile home lending, so I am not sure the same rules apply…but FHA requires a clear termite inspection prior to closing. If there is 10k of needed termite work, I don’t believe you can even get an FHA loan approved in this situation. I’d ask your current lender for clarification. Good luck.

  17. Ana says:

    Thank you for this article, I received a small claims lawsuit from the buyer stating that a $1500 credit for repairs was not given to her. After I investigated I see that my agent never submitted the addendum for the credit in lieu of repairs. I understand that it’s technically going to closing costs, but my understanding is that credits like that reduce the total loan amount for the duration of the loan, however this buyer seems to think she was to receive a check from escrow for the repairs. Is there a way for me to see if the addendum HAD been submitted how the buyer would have been credited? Thank you for your help!

  18. brianm says:

    Hello Ana. A credit in this situation would not reduce the loan amount, it’s literally just a cash credit that would be applied to the buyer’s closing costs. Had the addendum been submitted, the buyer would’ve been credited against their closing costs. So if the buyer closing costs were $6,000, for example, they only would’ve been $4,500 after the credit addendum. I hope that helps.

  19. Cecej says:

    Hello, I had an addendum in my contract of $4000 towards closing cost from the seller. Would that reduce my cash to close price by $4000? Im curious on why my credits from my seller on says $2500.

  20. brianm says:

    If it shows a $4,000 credit from the seller, then that is what you should get. Unless your closing costs are only $2,500? That would be a reason you are only getting $2500, because the $4000 can only be applied to actual closing costs, it can’t be part of a cash credit.

  21. Tyler says:

    Hello I am buying a home and the seller is only giving me a 1,750 credit towards my Closeout cost but the repairs for the windows is at 2,500. We have an admenent already and the seller said this is all they can afford even though I have a home inspection and contractor saying it will cost 2,500 dollars to fix. What should I do? We are looking to close by June 21st

  22. brianm says:

    Hello Tyler. Negotiating seller credits is just that, it is a negotiation. So there is no exact formula, and the seller does not have to give you an amount equal to the repair cost. It is all a negotiation. If they say all they can afford is $1,750 you can counter offer, and go back and try and get more, and if they say no, then you have to decide if that is acceptable to you. If not, maybe you have a contingency in the contract to void the deal? But I don’t know that you’d want to void the deal over a $750 difference. Good luck deciding what to do.

  23. Mic Chew says:

    Selling a property for $700k, buyer writes RPA for $900k and request $200k

    Seller to credit buyer $200,000 for payment to Forever Designs
    Buyer to pay outside of escrow payment from seller to Forever Designs $200,000.
    Is this okay?

  24. brianm says:

    That would never be allowed under any mortgage lender or any mortgage agency I know of. The buyer is trying to finance in a pile of extra cash. Not only is it against the rules, how will a 700k place appraise for 900k? This sounds fishy, and it won’t work.

  25. Jasmine says:

    Hello, I want to purchase a home for 70k, however I’m approved for a FHA loan of 75K. The house is perfect, however there may need to be some repairs under 5k, to apparently get FHA to close. What would you suggest I do.

  26. brianm says:

    If the home needs repairs to pass FHA appraisal inspection then the seller would have to make those repairs prior to closing. Or you can ask your lender if a “FHA Limited 203K Loan” would work in this situation.

  27. Laura M Fernandez says:

    Hi Brian,
    The Inspection reported that some roof tiles are loose and broken, water heater needs to be replaced, A/C duct in need of cleaning and sealing it, and some other stuff. Is is right to write an addendum asking for repairs before closing and asking to sellers’ give credit toward buyers’ closing cost?
    Thank you

  28. brianm says:

    Hello Laura, that should be fine as long as the seller credit doesn’t exceed the actual closing costs. And make sure that they don’t write the addendum stating that the closing cost credit is in lieu of the repairs, they should just write that they’re giving you the seller credit, period. Consult with your lender first, but this should be fine.

  29. Lindsay says:

    If the buyers received $9500 in seller concessions and the lender said it was ok for them to receive $5500 towards their closing costs and then on a separate addendum ask the seller to write a check for the remaining amount to a construction company so they can utilize that for the repairs instead of using it towards their actual loan. Is that ok? I thought there was no way a buyer could ever utilize concessions towards anything outside of the loan or their closing costs. The work would not even be completed until after closing and it would be on the buyers behalf with that check? It’s a conventional loan 20% down closing in one week.

  30. brianm says:

    I did not think that would be allowed, I don’t think we’d never allow that. I would talk to the lender more for explanation surrounding the logic for doing it that way.

Leave a Reply