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Closing cost credits are not uncommon in certain parts of California. In fact, when an offer is written with closing cost credits, it is a great solution for a buyer that doesn’t have tons and tons of available cash but qualifies to purchase the property. For those of you who have not worked with closing cost credits, that’s when the buyer asks the seller for a specific purchase price and also requests a credit of a specified amount (or a percentage of the purchase price) for closing costs.

If you are working with buyers that are requesting a closing cost credits or if you are a seller taking an offer with a closing cost credit, there is something you need to know. In addition to requesting a flat amount, a closing cost credit can also be a percentage of the purchase price. Agents writing offers with closing cost credits frequently prefer to request a percentage so that as the price negotiations continue, the percentage automatically adjusts with the revised purchase price. On the other hand, if the buyer were to request a flat amount, this would not change as the purchase price alters during the negotiations.

Here’s the thing that agents must understand: In most situations, lenders will only allow those closing costs credits to be applied towards closing costs. If you were to ask for a credit of $10,000 and there were only $7500 in closing costs, then where would the other $2500 go? That extra $2500 would not be credited to the buyer. Instead, it would disappear.

The new Residential Purchase Agreement (RPA 11/14) addresses the exact point, since apparently it has been a bone of contention in the past.

If you plan to request a closing cost credit for your buyer, check in with the buyer’s lender and make sure to correctly calculate the amount to request in proportion to the purchase price. That’s because you don’t want to be caught with an extra $2500 still on the table.