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Utilizing a Seller Credit to Save Your Cash: One of the best ways to minimize your out of pocket expenses when buying a home

Buying a home has been the American dream for many individuals. Being able to own your own house and get out of the rent cycle is one of the best ways to start building wealth and paying yourself first each month, however, one of the largest barriers too affording a house is the up front costs which include a down-payment and closing costs.

The down-payment for your home will be a minimum of 3% of the purchase price if you get a conventional loan, 3.5% if you go the FHA route or you can put 0% down if you are a veteran and get a VA loan.

Let’s take for example a house that costs $500k, if you get a conventional loan you will need to put down a minimum of 3% which is $15k for your downpayment. This will give you a 3% equity stake in your property off the bat and your loan will be for 97% of the property. 

The next large up front cost is your closing costs which range depending on your state but on average are between 2.5%-3% of your purchase price. So to stick with our example above, you purchase a house for 500k. You should expect your closing costs to be between $12,500 and 15k roughly. Your lender will be able to provide an “ALCI”, Approximate Loan Cost Illustration, report prior to submitting an offer so you can see roughly the total cash to close you will need. 

Your closing costs include a few standard things such as the banks appraisal, if you are securing a loan for your property the bank will need to confirm the property is worth your purchase price, also there will be a property records search to make sure the title is clear, title insurance, there will be attorney fees, credit report, underwriting fee, deed recording fee, country tax record, state transfer tax, prepaid taxes etc. All of these add up to the 2.5-3% for closing costs.

Now you are looking at roughly 30k for your cash to close on a 500k home, which many people who are actively renting are turned off by and decide moving forward on buying a home is too expensive for them and they choose to keep spending their money on rent paying for someone else’s mortgage. 

A solution to reduce your out of pocket expenses and keep more cash in reserve for either repairs that may be needed in the near term, minor renovations you’d like to address early on or simply having a larger cash cushion for emergencies is using a “Seller Credit” in your offer.

A Seller Credit is when you write an offer on a house and on the sales contract you include a seller subsidy as depicted in the photo below. Instead of you as the buyer covering your closing costs the seller would pay for that portion of your expenses 

So why would the seller agree to this? If they listed their home for 500k and you write your offer for list price you would need to bring roughly 15k on top of your downpayment to closing. If you write your offer with a seller credit of 15k you would write your sales price as 515k in section A. and in section D. you would put 15k as the credit so that the seller would still walk away with a net profit of 500k to meet their financial goal and you would have the additional 15k they paid included into your loan payment paid out over your loans lifetime. 

So in short, they still made 500k on their home, they pay for your closing costs out of the additional 15k they received on their property and your closing costs instead of being paid for upfront all at once by you is paid out over small payments. Let’s break down what this would look like financially. 

We are going with a 6% interest rate for this example. Instead of paying 15k upon settlement you would increase your monthly mortgage payment by $89 a month or $1068 a year. Using this strategy is an excellent way to minimize your up front costs when buying a home and provides extra funds to go elsewhere.

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