Happy Friday!
Every week I research the questions homeowners and buyers are asking Google and ChatGPT about home purchases, mortgages and the issues surrounding homeownership.
This week I want to turn that around and give you a question to ask me before you negotiate your next offer:
If the seller is willing to give $20,000, where should we put it?
Should a buyer negotiate $20,000 off the purchase price?
Or would they be better off keeping the price where it is and negotiating $20,000 toward their financing and closing costs?
The answer may surprise your buyer—and it definitely isn't the same for everyone.
A simple example
Suppose a buyer is purchasing an $800,000 home and the seller is willing to give up $20,000 to make the transaction happen.
Reducing the price to $780,000 sounds terrific. And depending upon the transaction, it may absolutely be the right choice.
But a $20,000 reduction in sales price doesn't translate into a $20,000 reduction in the loan. If the buyer is financing 80%, for example, the loan amount only decreases by about $16,000.
Depending upon the buyer's interest rate, that's likely a relatively modest reduction in the monthly principal-and-interest payment.
Now let's consider keeping the price at $800,000 and using some or all of that $20,000 as an allowable seller credit.
Depending on the loan program and the buyer's particular situation, that money could potentially help with:
- Closing costs and prepaid expenses
- Discount points for a permanent rate reduction
- A temporary interest-rate buydown
- Preserving some of the buyer's cash rather than using all of it at closing
Seller-paid financing concessions such as discount points and temporary buydowns are recognized under conventional guidelines, subject to applicable interested-party contribution limits and program requirements.
The point isn't that the seller credit is always better. It isn't.
The point is that we should do the math before deciding how to negotiate the $20,000.
Karen's Desk
This is where I can really help before you write the offer or counteroffer.
Give me the purchase price, the amount the seller may be willing to concede and a little information about the buyer.
I can model the alternatives:
What happens if we reduce the price?
What happens if we use the money toward closing costs?
What happens if we use it toward the interest rate?
What happens if we structure a temporary buydown?
And which option leaves this particular buyer in the strongest position?
A few times I have had clients who were running short of cash to close. Before the appraisal was performed, they went back to the seller and increased the price by the amount needed and then negotiated a seller credit FOR THE IDENTICAL AMOUNT-- which the buyer used toward all closing costs. And, the proepty still appraised just fine, with the new higher purchase price. The increase in the mnthly payment was minimal but it saved the deal.
Ask Karen
“Can we just ask for a huge seller credit and use whatever is left over?”
No. Seller contributions are subject to loan-program rules, and the allowable amount and permitted uses vary.
For example, FHA generally permits interested-party contributions up to 6% toward eligible borrower costs. HUD VA's rules are different: certain seller concessions are subject to a 4% limit, while some ordinary closing costs and discount points are treated differently under VA rules. Benefits Conventional financing has its own interested-party contribution requirements.
And importantly, a seller credit isn't simply cash the buyer gets to pocket at closing.
That's another reason to call me before putting the number into the contract.
Realtor Talking Point of the Week
When a seller is willing to negotiate, instead of automatically saying:
“Let's ask for another $20,000 off the price.”
Try:
“Before we decide how to use that $20,000, let's have Karen calculate which option gives you the greatest benefit. A price reduction, closing-cost credit or financing concession can affect your transaction very differently.”
That's a much more valuable conversation than simply negotiating price.
The takeaway
Don't just negotiate the price. Negotiate the transaction.
If you have a buyer getting ready to write an offer—or you're working a counter and there's money on the table—call me before you decide where to put it.
Sometimes a few minutes running the numbers can make that $20,000 work much harder for your buyer.
Have a wonderful weekend!
Karen Card
Sr. Loan Officer | NMLS #235218
The Card Team | American Pacific Mortgage
714-290-6940
www.card-team.com
