You’re buying a home and you’re negotiating with the seller when you’re asking for approval. The seller agrees to use some of his money to sweeten the deal. Now, it’s up to you to decide which permits will give you the most value.
Here’s what you need to know as you weigh your options.
Three ways to use vendor permissions
If a realtor is willing to work with you to make a home more affordable, there are three main ways they can help you.
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First, they can give you a closing cost credit. This is an upfront fee that covers some or all of your closing costs, which lowers the amount you need to bring to the closing table. The credit may cover common closing costs, such as title insurance or appraisal fees, or it may go toward prepaying other costs at closing, such as homeowner’s insurance premiums.
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Second, the seller can pay temporarily or permanently purchase rate. To buy the interest rate temporarily, the seller deposits money into an escrow account, and the funds are used to cover the rest of your interest during the one- to three-year purchase period. A fixed rate purchase involves paying the borrower discount points at closing to permanently lower the interest rate charged.
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Finally, the seller can give you a price reduction. Lowering the purchase price of a home reduces the amount you have to borrow and can lower your down payment and monthly mortgage payment.
→ Read more: Merchant approval versus credit
Statistics – what each option saves you
Let’s look at an example to see how these vendor permissions compare. Let’s say you buy a $400,000 home with a 5% down payment and take out a 30-year conventional loan with an interest rate of 7%. The following table shows the figures, using figures from RMC Home Mortgage.
A closing cost credit lowers your upfront costs, but doesn’t affect your monthly payment or result in any additional savings over time. Buying down permanently lowers the monthly payment and may be beneficial if you are going to keep the mortgage for a long time. Buying 2-1 lowers the monthly payment significantly during the first year, but because the effect is temporary, it is good if you plan to move or refinance. And the price reduction leads to a small decrease in both the down payment and the monthly payment.
When to choose a closing cost credit
Consider asking for a closing cost credit if you’re having trouble coming up with enough cash to close. You can expect to pay 2% to 5% of the loan amount in closing costs, or $7,600 to $19,000 for a $380,000 loan. If you can’t raise those funds from friends or family, a merchant franchise can be a great alternative.
A closing expense credit can also be helpful if you have other upfront expenses related to your move. For example, maybe the home needs a little repair or improvement, and you want to take care of it yourself rather than waiting for the seller to do it. You can negotiate a closing cost credit, and then use the money you would have spent on closing costs to pay for the homework.
When can you choose to buy a measure
Buying a ratio can be a profitable concession when interest rates are high.
If you plan to keep your mortgage for several years, you may want to buy a permanent one. This lowers the rate you pay over the life of the loan, and, as a result, your monthly payment is permanently lower. The savings can add up significantly over time.
A short-term purchase rate can give you an even bigger reduction in your monthly payment, but is valid for two or three years at most. Buyers may choose this option if they are confident that they can refinance to a better value at the end of the purchase period, or if they do not plan to stay in the home for a long time.
“Perhaps they move to another state, or they know that they will be reassigned to another position in a short time. That [temporary] buying and making it more affordable,” said Chris Parks, Sales Manager at Churchill Mortgage.
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When to choose a price reduction
A downgrade can make sense if you’d like to lower the total amount you borrow. Maybe you are on the verge of needing a jumbo loan, and you would prefer to borrow less and get a regular loan. Or maybe you’ve saved enough for a 20% down payment to avoid paying mortgage insurance, and a price drop could raise your down payment to 20% of the new loan amount.
→ Read more: Jumbo loans: How to buy a house with a high price
Parks often see price reductions to attract buyers who want to pay off their bills as quickly as possible.
“That type of buyer is usually aggressive in wanting to get rid of debt, so those people will use the early payment calculators that I give them and other things like this because they want to get rid of debt quickly,” said Parks.
Can you ask for more than one?
You can ask to combine the seller’s approvals, with the caveat that the amount of the approval cannot be more than the limit of the type of loan you are taking. The maximum clearance is a percentage of the purchase price, or in some cases, a limited amount.
“If they’ve negotiated a very sweet deal in terms of vendor agreements, we try to make the purchase as permanent as possible, and then whatever’s left, we try to reduce the price. That’s the most common way we see it,” said Parks.
Which one is right for you?
Ask yourself these questions to see which dealer approvals you may be able to benefit from.
Do you have enough money to close? If not, consider a closing cost credit.
Are you facing high interest rates, and planning to keep your home loan for a long time? Buying a fixed rate can lower your monthly payment and save you interest over the life of the loan.
Are you looking to lower your interest rate but expect to refinance soon? A short-term mortgage can provide you with significant savings on your payments over the next year or two.
Is your pay less than you would like? A downgrade can reduce the size of your loan so your down payment can go further, possibly eliminating the need for PMI if your down payment was less than 20% of the original amount.
Is the seller very willing to negotiate? If you see a home that has been on the market for 30 days or more, it may be in your best interest to request a permit combination.
Evaluate buying down vs. closing costs vs. price reduction FAQs
Is it better to get a lower price or ask for closing costs?
The best option depends on your financial situation and goals. If you can easily cover the closing costs yourself and want to limit how much debt you take on, you can opt for amortization. If you don’t have a lot of cash on hand, you may benefit more from help with closing costs.
Can seller approvals cover both purchase and closing costs?
You can use dealer approvals for both equity purchases and certain closing costs, but the total amount of approvals cannot exceed the approved approval limit for a particular loan type.
Does the price reduction affect my down payment?
If you’ve decided to make a down payment equal to a certain percentage of the purchase price, lowering the purchase price lowers the amount you have to put down. For example, let’s say you offer to buy a $400,000 home and plan to pay 5%. At full price, your down payment is $20,000. If the seller lowers the purchase price to $390,000, then your 5% down payment is $19,500.
Which is better for the seller – price reductions or concessions?
Some sellers may choose to reduce the price because it lowers the agent’s commission fees and transfer taxes, which are calculated as part of the purchase price. But if you’re buying a home from a builder, the builder may choose a clearance rather than a price reduction. Price reductions may affect future valuations of other properties the builder sells nearby, limiting the prices they can charge later.
