What is a "Credit at Closing"?
Let’s pretend you have purchased a home and, following the advice of a competent buyer agent, you have a home inspection performed. The home inspection reveals a structural issue sufficiently rising to the level of a “major defect” which needs to be addressed and resolved.
For detailed information on home inspections, read “What is a Home Inspection?”
The major defect identified in the home inspection report could, for example, be a mold condition discovered in the attic, a bowed foundation wall in the basement, a roof that “…has exceeded its useful life…” or, an electrical service panel known for causing fires. The home inspector will likely recommend the purchaser of the home solicit the input and repair estimates of a qualified professional in the respective area of the major defect. The home seller may secure estimates of their own for comparison and, potentially for purchase contract renegotiation.
Can I Renegotiate the Price?
Once those estimates are secured, the home buyer may successfully renegotiate the terms of the purchase and sale contract through their buyer agent/broker or attorney. The seller may agree to compensate the home buyer with a “credit at closing” in the amount of money mutually agreed rather than repair the defect themselves prior to the transfer of title (the closing).
What Are My Best Options?
A credit at closing to address the major defect can be applied in different ways. For example, a credit at closing may mean the amount of money agreed upon will be subtracted from the purchase price of the home at the time of closing. This may be agreeable to the purchasers, yet this option should be understood clearly and considered carefully.
A credit against the purchase price at the time of closing means the purchaser will not directly receive money necessary to have repairs made. A credit against the purchase price means the amount of money for the repairs will be simply be deducted from the purchase price. While this reduces the amount of money the home buyer pays for the house, the purchaser will be found in the position of having to pay for the repairs out of pocket, something few home buyers desire to do, especially with the major outlay of cash which typically occurs at the real estate closing table.
What is a Safer Solution?
A safer alternative, perhaps, is to accept the credit at closing in the form of a check to make the necessary repair after the home buyer assumes title to the property.
If the purchaser is mortgaging the home they purchase, some mortgage lenders may prefer, if not require, the repairs be completed prior to closing rather than allowing the purchaser to accept and receive a credit at the closing. This requirement shields the mortgage lender from exposure by preserving its financial interest in the mortgaged property.
There are several other reasons or transactional scenarios in which a credit at closing (also known as a “seller concession”) may be considered and granted. Yet, the general application is comparable.
It can be intricate, yet, it doesn't have to be stressful.
Buying and selling a home can be an intricate experience.
Relying upon a competent and experienced real estate professional can take the anxiety and uncertainty out of the experience and replace those with composure and confidence.
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