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Is Cash Back at Closing Legal—and a Good Idea—Today? What Homebuyers and Sellers Should Know

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The process of buying and selling a home is a multipronged negotiation. Everything from the asking price to the closing timeline to what fixtures come with a property is a back and forth between buyer and seller.

Yet sometimes, what a buyer wants—or a seller agrees to—can land in a legal gray area. So it’s vital to clearly understand one of the most confusing real estate terms: cash back at closing.

If you’re a seller with a house lingering on the market or a homebuyer looking for ways to offset higher interest rates and home prices, cash back at closing might be an option that suits both parties—if you do it legally.

So here’s everything a buyer and seller need to know about how to negotiate cash back at closing on the up-and-up.

The evolution of cash back at closing

Cash back at closing occurs when a buyer agrees to pay more for a property than its market value.

It was so a buyer could borrow more money than the home was worth. Then the seller would give the buyer actual “cash back”—the difference between the sale price and the loan amount—after the title transfer.

Now, that’s a major no-no. Lying to the lender has always been illegal—and once mortgage fraud got out of hand in the 2000s, President Barack Obama signed the Fraud Enforcement and Recovery Act in 2009, specifically created to crack down on these shady practices.

What does cash back at closing mean now?

When people use the term “cash back at closing” today, it equates to a closing cost credit.

This credit goes from the seller to the buyer at closing and is also known as seller concessions. In a nutshell, the seller is reducing the amount of cash a buyer needs to close, all in an effort to sell the home.

For instance, a buyer can offer $300,000 and ask for $3,000 in concessions. Usually, a seller will counteroffer with a higher asking price of $303,000 to cover the $3,000 in concessions.

So while a seller concession might provide short-term relief for a buyer at closing, the buyer is ultimately responsible for a larger loan amount. But in the short term, the credits may help a buyer who’s short on cash land a home.

“Credits can cover any number of things,” says John Gluch, founder of Gluch Group Coronado Island Real Estate in Coronado, CA. “Most commonly, you’ll see them used for title fees, escrow fees, lender fees, and real estate commissions.”

Why would sellers give buyers closing cost credits?

It may seem counterintuitive for a seller—who wants to get as much money as possible—to give buyers credit.

But with interest rates climbing, buyers are becoming more selective. Bidding wars are quickly fizzling out. So sellers are appealing to buyers’ pocketbooks.

“As the saying goes, ‘Everything is negotiable,'” says Nurit Coombe, managing partner at The Agency D.C. Metro. “Buying mortgage points is now becoming more relevant. As a result, you see sellers offer to pay the buyer’s loan discount points so that the loan will have a lower monthly bill.”

Sellers might also offer closing cost credits toward HOA dues or property tax refunds, inspection and appraisal fees, utility connection fees, and solar panel lease payoff.

“Sellers pay for these concessions in the form of a credit from their equity position of the property,” says Coombe.

In other words, no actual cash changes hands.

Are there limits to closing cost credits?

Yes. The buyer’s lender sets the limits. These vary by state and the type of loan.

With a Federal Housing Administration loan, the seller can contribute up to 6% of the closing costs. And for a conventional loan, the seller can provide up to 9%, depending on the down payment amount.

Essentially, seller concessions can’t create a negative balance where the buyer gets more credit than the value of the total closing costs.

Can buyers ask for closing cost credits?

Typically, sellers aren’t advertising closing cost credits, so buyers have to ask for them.

And in a softer market, the frequency and popularity of closing cost credits could rise. In a buyer’s market, home shoppers are more discriminating and looking for ways to offset higher interest rates and combat inflation.

In addition, homeowners who want to sell their house quickly are more likely to negotiate seller concessions that work for both parties.

When closing credits don’t make sense

Surprisingly, getting credits at closing may not always be the smartest move for the buyer.

“If you can’t afford a higher monthly payment but have the cash to pay for closing costs, then you should negotiate a lower sales price,” suggests Coombe.

Lower monthly mortgage payments could mean saving tons of money throughout the life of the loan versus saving a few thousand bucks in closing cost credits.

And a word of caution to sellers: “Anytime you offer concessions, that’s money coming out of pocket and decreasing your net,” says Gluch. “Instead, a seller could have listed the home at a lower price to accommodate for the value of repairs, etc.”

A lower price could be enough to get more eyeballs on the property and an offer on the table.

The post Is Cash Back at Closing Legal—and a Good Idea—Today? What Homebuyers and Sellers Should Know appeared first on Real Estate News & Insights | realtor.com®.

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