HUD Articles

In today’s market, real estate transactions under contract often present buyers with the opportunity to receive concessions from sellers. This may come about as result of the outcome of a home inspection, a material change in the property or an appraisal valued at less than the contract sales price. Depending on the situation, the seller may decide to allow concessions for these changes.  A couple of those concessions may be either a closing cost credit or a price reduction.  What are some key similarities and also, key differences between these two types of concessions and if offered which one makes sense for you?

To start, a closing cost credit and a price reduction amounts to exactly the same thing to the seller. If during negotiations the seller offers either of these concessions, it simply means they will receive less profit from the sale of their home. For example, if the contract price is $200,000 and they offer either a credit or a price reduction of $5,000, in the end it will net out to $195,000 due to the seller at closing, less the usual and customary seller costs. However, in this same scenario, it means a world of difference to the buyer.  How so? Let’s examine the differences.

Closing Cost Credit

In the scenario mentioned above, if you are offered a $5,000 credit at closing, this basically means that seller is willing to short their profit from the sale of their home to allow this amount to lessen your closing costs.  How and to what specific costs the credit can be applied is a topic for a different article. Generally speaking, it will lessen the amount of funds you need to bring to closing to cover your down payment and other costs.  This means more cash remaining in your pocket, so to speak.

Price Reduction

In the same scenario, if you are offered a price reduction, it will have a minimal effect on how much cash you will need to bring to closing.  This is because the amount to bring may be based largely on percentage of the purchase price, less a few set costs that remain the same despite the price. In this case, a $5,000 price reduction is only a 2.5% reduction in the sales price. This will mostly amount to a only a 2.5% reduction in your percentage based costs, which is not very much.

Which concession makes most sense to you? It really comes down to your goals.  Is your home purchase a FOREVER home or a FOUR (years)-EVER home?  In other words, do you plan to stay in your home and pass it on to your heirs, or is the home purchase a brief step up lasting only a few years until you sell and purchase another home? If your plan is to stay long term or forever, a price reduction may make the most sense. In this scenario, a $5,000 price reduction amortized over 30 years could save as much as $8,000 in interest over the life of the loan. On the other hand, if you plan to live in the home for only a short time, an immediate reduction in the amount of cash brought to closing may make a closing cost credit more attractive.

As is always the case, if you are offered any concession that lessens the amount of the profit to the seller, the decision on how to take that concession should be based on what makes the most sense for you now and in the future.