Seller Credits - Genius or Illegal?

[Alex Owens]

What's going on BP! 

I want to get some feedback on a strategy I have used in the past. I have searched the internet for answers and have not been able to pin down a concrete answer.

The strategy is using a seller credit to get cash back at closing. Let me run you through an old transaction I used this on: I purchased a home that was for sale for $105k  (it ended up appraising at $155k). I offered the seller $130k with seller-paid closing costs and an additional $26k credit at closing. I still had to bring $26k to closing in order to cover the down-payment, but I left closing with a $26k check from the seller to essential end up with no money out of pocket (in reality, I used the $26k to make repairs on the property).

I know there are certain limitations on particular loan products that limit the maximum amount of seller credits allowed (6% for FHA, 4% for VA, etc.); however, I am using a commercial line of credit that does not have a limit on seller credits. The $26k seller credit was written in the "additional provisions" section on the original contract and was approved by the bank, seller, and title company. 

I have a friend who has tried to use this strategy and was told by a realtor that seller credits are illegal at closing. Like I said previously, I have done quite a bit of research on this topic and have not been able to find a concrete answer to support her claim, but I wanted to get some feedback from the BP community. 

I would think that if all parties involved are informed and agree upon the seller credit, it should not be an issue. The property appraised much higher than the raised purchase price so the bank was not over-funding the asset. I know the rules are different for residential financing and commercial financing so perhaps that is the only reason my friend was not able to do the seller credit. If anyone has any insight/experience in this area I would love to hear some feedback! 

[John Warren]

@Alex Owens I know seller credits are 100% legal. Whichever realtor told you that was flat out wrong. In fact, I use the same strategy you mentioned with a lot of my buyers to help them bring less cash to closing. I pulled this off recently on a REO in Riverside, IL. We negotiated the price to 280 k, then asked if they would do 287k with a 7k closing cost credit. The buyers had to show up with $2500 to buy a beautiful home in an A+ neighborhood.

Like you mentioned, the only real issue you will run into is that conventional loans don't allow for credits beyond a certain point. This gets tricky if you have negotiated a large seller credit, and then you end up negotiating for repairs or something else comes up. I did have a deal in Berwyn this year where our credit was too large, and the buyers weren't able to receive all of it due to the lender.