Suppose you’ve scrimped and saved for years for a down payment and finally found a place that you want to call home. Now, it’s time to submit an offer. But suppose the apartment is in need of repairs, or your furniture won’t fit and you don’t quite have the money to buy new pieces. Or maybe you’re simply strapped for cash at closing. One thing some buyers do is ask for credit at closing. Here’s what that means and how to decide if it’s a good option to consider.

What is credit at closing?

Credit at closing, or a closing credit, in simple terms is money the seller gives to the buyer at closing. Take an example of buying a $500,000 condo. Let’s assume you’re offering the full asking price and putting 20% down ($100,000), while financing the other 80% for a total mortgage amount of $400,000.

But suppose the apartment needs new appliances, or the home inspection uncovered substantial issues. As part of the negotiation process, you might choose to ask for a closing credit of $15,000 to help pay those costs.

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How a closing credit affects your closing costs

It’s important to note that you’ll still need to pay closing costs when the deal goes through. However, buyers receiving a closing credit typically pay reduced closing costs as a result. Here’s how it works.

In our condo example, the buyer can expect to pay approximately 4-6% of the total purchase price in closing costs. We’ll assume you pay 4%, which pencils out to $20,000. But if you receive a $15,000 closing credit, that means you’re responsible for $5,000 in closing costs ($20,000 – $15,000 = $5,000). The closing credit comes out of the seller’s pocket, and is applied toward your closing costs.

Why not just reduce the offer price?

You’re probably wondering, why not just take $15,000 off the purchase price for the home? The simple answer is because it doesn’t amount to much once it’s rolled into the mortgage, and most importantly, you need the money at closing to make the repairs or improvements.

Let’s do the math. Say you negotiated the price from $500,000 to $485,000. Your 20% down payment would be $97,000, while your mortgage amount would be $393,000. At 4% of the purchase price, your closing costs would amount to $19,400. That’s $14,400 more than in the scenario where you receive a closing credit.

If cash is limited, the closing credit is often a superior option. Your closing costs will be lower and your mortgage amount will be slightly higher, but with a 30-year fixed-rate mortgage, the difference in your monthly payments would be less than $50. It’s a small trade-off, but worth considering when thinking about your financing and closing costs.

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Will asking for a closing credit upset the seller?

Yes, requesting a closing credit might not be the seller’s first preference. But ultimately, the amount of money the seller receives at closing is the same in both scenarios. Therefore, if a seller is highly motivated to sell their property, it can be a good solution to help them close on the home sooner.

Additionally, if the home is a sponsor unit, a closing credit can be appealing to the developer of the building. It allows them to sell the unit without giving other buyers the impression that the building is lowering its asking prices — which has a direct impact on future sales.

A closing credit and a lower purchase price may have a similar effect on the seller’s proceeds, but it can affect your finances as a buyer very differently. Before deciding which option to pursue, you’ll want to review the numbers carefully. Working with an experienced real estate agent — perhaps one who’s helped other buyers receive closing credits on similar deals — is a great way to fully understand the process, and maximize your chances of the outcome you want. Start by contacting our Concierge for buyers, who can match you with a StreetEasy Expert agent with the right expertise for your needs.