Seller Credit for Repairs: A Complete Guide

By: ROS Team

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Buying a new home involves multiple steps, and negotiating repairs is just one of them. You negotiate with the seller to get the best possible deal during the buying process. Some sellers might not agree to foot the bill for minor repairs. While others won’t have enough money to cover the repairs for the buyer prior to move-in. It’s good to thoroughly understand how the seller can pay for the necessary repairs because it’s often a sticking point for buyers.

Here is a complete guide on seller credit to buyers for repairs to read before you sign an agreement with a seller.

What is Seller Credit for Repairs?

Let’s assume a best-case scenario in which the seller has agreed to cover the repairs identified during the inspection. It’s a good idea to include a clause in the sales agreement that says if the seller fails to complete the repairs, the buyer may back out of the deal. This means the sales transaction becomes contingent on the seller’s agreement to pay for any issues found during the inspection.

Seller Credit

But what if the seller doesn’t agree to make any repairs and the buyer is still interested in purchasing the property? In such a case, the buyer may ask the seller for a seller credit for repairs, which can be credited towards the final sales price. Sometimes, seller credit can be adjusted, making the house’s sales price higher so the buyer can finance both the house and the repair costs.

Seller’s credit is usually not used for minor wear and tear, which can usually get addressed quickly before closing. The buyer can request that the seller fix normal wear and tear or reduce the sales price. In contrast, a repair allowance at closing is used to cover major electrical, mechanical, or structural problems such as a new roof or installing a new central air conditioner system.

How Does a Seller’s Credit Work?

There are several ways to apply the seller’s credit for repairs during the closing process; the buyer and seller can mutually agree on what works best for both parties. The most common option is for the seller to offer to pay some of the buyer’s closing costs so the buyer has more of their own money to pay for the repairs. This is known as seller assist. It essentially means the seller is willing to assist the buyer by paying money towards closing costs.

Another option is to include the seller credit in the final sales price so the buyer can pay them through mortgage installments. One way to do this is by having the seller pay a contractor directly to make the needed repairs. In addition, the seller may keep the money in escrow. Which is using a third party to hold the funds, until the work is done, and the seller can get back whatever funds were not used.

Seller Credit Work

Pro Tip: If the seller wants the closing credit to be paid to a contractor, you should talk with your real estate agent to get an understanding of how that will impact the sales price.

Most FAQ – Seller Credit for Repairs

Can You Ask the Seller to Pay for Repairs at Closing?

Yes, you can. You can ask the seller to pay for needed repairs at closing unless the seller has already paid for any minor work before the sales transaction is finalized. The seller usually places the repair money in escrow or gives the money to the buyer in a lump sum.

Can You Use Seller Credit for a Down Payment?

No, you may not. Any funds received as a seller credit should be used for repairs and can’t be used as a down payment.

How Can You Use Seller Credit?

You can use a seller credit to cover the closing costs. However, sellers can also give you a repair allowance at closing; this is often done when the property is sold during a buyer’s market. You can use the seller credit for repair work on the property, but if you end up saving money with the seller credit, you are supposed to return the unused funds to the seller.

The best thing you can do is incorporate a clause in the sales agreement. That specifies what the seller’s credit can be used for. Along with an exact dollar amount. Work with your broker to write the clause.

Can You Deduct a Seller Credit from Your Income Taxes?

No, you cannot deduct a seller credit from your federal tax returns. However, a seller can include the seller credit payment with the house expenses to reduce the net profit should it be large enough to qualify for capital gains.

It is worth mentioning that a seller is not bound by law to give a buyer credit at closing for repairs. If you don’t get the seller credit, you might have to decide if you’re still willing to buy the house.

What If the Seller Won’t Make Repairs After the Inspection?

It’s in the seller’s best interest to agree to pay for reasonable house repairs. This is mainly because if a home inspection uncovers an issue that wasn’t initially disclosed, the sellers will be required to disclose those issues in future listings. After all, sellers cannot conceal issues that may make buyers back out of the agreement.

Seller Won't Make Repairs

Additionally, for buyers, lenders require that all necessary repairs are complete before approving the home loan. If the seller still refuses to make the repairs. Buyers have the right to back out of the deal without penalty. Or, if the seller doesn’t agree to provide the buyers with credit at closing for repairs. The buyer can try to negotiate a lower sales price.

Negotiate in Writing

Seller credit for repairs is entirely negotiable. So it helps if you include all provisions in writing so that there’s no misunderstanding at closing. The attorney handling your escrow should have a mutually signed document containing instructions on which expenses the credit can cover and how much can be deducted from the seller’s net profit. It may also prove helpful to negotiate a seller credit to the buyer for repairs upfront when making the offer to buy.

Final Words:

Technically, there is no restriction on when repairs must be made to a property; they can be completed before or after closing. However, in most situations, buyers won’t receive the funds needed to complete the home’s repairs until closing.

Having said all that, if the seller has chosen to pay for the home’s repairs before the closing phase. It’s in the buyer’s best interest to have the repairs made and review them before the final walkthrough. If you are not satisfied with the repairs. You will be in a better position to ask the seller to work with you to correct issues before closing.

What you want is the best possible deal for buying a home. It’s common to have some needed repairs. So it’s in the buyer and seller’s best interest to agree on who will take care of the repairs.

Note: Always ask your lender what forms of seller credit are acceptable for your specific home loan application.