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Understanding Seller Credits

December 21, 2023

You may have seen it in one of our local Bozeman real estate listings: “Seller offering $10,000 in seller credits for buyer rate buy-down, closing costs, and prepaids.”  This language is more common in this market with high prices and rates.  That sounds great for a buyer, but what exactly are these terms and how can they help you purchase a home in Bozeman?  In this blog, we’ll take a deep dive into seller credits and what they can do for your potential mortgage and home purchase.  They are one of the reasons putting off a home purchase now may not be a good idea.  Then we’ll see why having the right mortgage lender by your side can maximize your benefit!

 

What are seller credits?

Let’s start with the basics.  A seller credit is a contribution made to a buyer’s closing costs that comes directly from the seller’s proceeds from the sale of their home.  There are two key words here: “seller” and “closing costs.”  Seller credits have to come from the seller and they can only be applied to a buyer’s closing costs.

 

What constitutes a closing cost?  How are seller credits applied?

This is where it can get tricky for a first-time home buyer!  Seller credits can only be applied to closing costs.  Closing costs include loan fees, title fees, services like appraisals, and prepaids.  For the first-time home buyer, the important thing to note is what is NOT included in closing costs: the down payment.  No matter how many seller credits you get, they cannot be applied to down payment.  Now that we know what constitutes closing costs, let’s address the two items we mentioned earlier in our typical real estate listing: rate buy-down and prepaids.

 

Rate Buy-Down

This is a popular one in Bozeman right now with relatively high rates and high home prices.  In this scenario, seller credits are used to buy down the rate.  This means you are paying more money up front in the form of closing costs to achieve a lower rate.  The ratio of cost to rate decrease depends on a multitude of factors including your loan type, loan amount, loan-to-value ratio, etc.  Curious how different rates affect your monthly payment?  Use our mortgage calculator to compare!

 

Prepaids

This is a term you might have heard thrown around by your lender or your realtor.  It refers to costs that are prepaid at closing, which are your homeowner’s insurance and property taxes.  These are paid up-front so that you are current from day one.  Seller credits can be used to contribute to these costs.

 

BONUS: 2-1 Buydown

We didn’t want to leave this one out because it can be very helpful to a first-time home buyer!  Rather than permanently buying down a rate like we talked about earlier, seller credits for this scenario are used to offset a buyer’s monthly payments for two years.  Let’s say a borrower has a 7% interest rate loan.  With a 2-1 buydown, their first year of payments is equal to the same loan with a 5% interest rate, and the second year is equal to the same loan with a 6% interest rate.  That can certainly help a new homeowner ease into homeownership!  Compare those payments side by side using this loan comparison calculator.  

 

Where does GoPrime Mortgage fit in?

You’re probably thinking (rightly!) that this is a lot of information to deal with.  How do you structure an offer with seller credits?  How do you most effectively use the seller credits you’ve negotiated?  This is where having the right lender comes in.  Your GoPrime Bozeman team is your advocate and your strategist!  We can work with you and your realtor to translate your goals into a hard number that you can present confidently to the seller.  Then we can explore how to apply your hard-won seller credits in the best way possible for your priorities, whether that is savings in closing costs, reaching a certain rate, or a combination of those.  Contact us today to start a conversation with your advocate and strategist!

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