Buying a home evokes strong emotions. Goals, dreams, family, and friends are usually part of the emotional package. The home searching process can be an emotional roller coaster. It is generally a relief to finally get the right home at the right price under contract. Then the home inspection process starts. For older homes it is common for there to be necessary repairs such as the sewer line where the cost can be up to $10,000, if not more. Consult the Realtor® about your options comes next. Assuming the Seller doesn’t want to do the necessary repair, the buyer can pay for it once the home is owned, or a price reduction or credit can be requested. Often time buyers and sellers don’t know the difference between a price credit versus a price reduction. Well, today is your lucky day, because I am going to tell you the difference.
Price Reduction
The price reduction is exactly what it is. It is a reduction in the contract price. This can be fine if it is a cash transaction, or with a large down payment. But if a mortgage with 20% down or less is planned, a price reduction may not be the best option. This is because part of the price reduction would reduce the mortgage. For example, out of a $10,000 price reduction, with 20% down, $2,000 as a down payment reduction, and the $8,000 goes towards a mortgage reduction. Although that has its advantages, it doesn’t give the full amount needed today to fix the sewer line.
Credit
A credit is when the Seller will “give cash back” by covering some of the closing costs towards the escrow/settlement, lender, or insurance costs. For example, if there are various costs that total of up $10,000 that have to be paid by closing, and the Seller agrees to provide a $10,000 credit for the sewer, then that would reduce closing costs to $0. That is cash in hand today! Better yet it saves buyers from using valuable after tax money.
So what happens if the total credit request is more than the closing costs? Then the remainder goes towards the purchase price.
So next time you buy, or even when you sell and there are inspection issues, you now know the difference, as well as the options. Please feel free to contact me to give you my expert opinion that will best fit your unique situation.
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