Turn Older Home’s Lemons into Lemonade

By Marcus McCue, vice president of Guardian Mortgage Co. Inc.

East Dallas has many wonderful older homes and cottages that tend to be in a constant state of upkeep. It can be difficult sometimes to sell a house that needs repair or to make repairs in time for a potential sale.

Sometimes the seller does not have the needed cash to make repairs up front before the sale. One technique that can be very successful for both seller and buyer in this case is “seller credits to buyer in lieu of repairs.”

Seller credits are commonly suggested when the buyer has a hardship providing adequate funds for the down payment and closing costs at the time of closing. However, this same contribution can be an option used by sellers. Often there are cosmetic items noted in a buyer’s property inspection report like chipping paint, outdated carpets, and cracks in the window seals. Instead of painting, replacing carpets, or sealing windows prior to the closing, the seller can get a quote completed for the repairs and provide a credit to the buyer in exchange for not completing the repairs.

The contribution cannot be used to reduce the buyer’s required down payment or any required investment by the loan program. However, it can be applied to the remainder of the cash needed to close. Additional limitations on these contributions are percentages of the overall loan size. Figuring the percentage is a little technical and you will want to confirm your numbers with your lender when you are agreeing to the amount with your transaction partner.

It uses a number called “combined loan-to-value,” CLTV, which is the total loan balance divided by the property value. The more of a down payment the buyer pays, the more contribution the seller can make. The chart below shows the limits of seller contribution based on the buyer down payment and CLTV.

Therefore, on a primary residence where the borrower provides a down payment of less than 10 percent, the seller can have a contribution of up to 3 percent. If the down payment is 25 percent, the seller can contribute up to 9 percent. On investment properties, the maximum contribution from the seller is 2 percent, regardless of the down payment size.

If there is a credit in excess of the buyer’s actual costs and expenses, that credit can be applied to buying points on the loan, which will reduce the cost of the loan to the buyer. Most buyers use the extra cash, of course, to make repairs after the closing.

Be sure to talk to your lender and realtor when structuring the agreement to set it up correctly. The seller’s contribution, for example, should be included on the contract in Section 12(1) (b) and not in the “special provisions” section.

Underwriters do not want to see any language in the contract that states “in lieu of repair.” Both the buyer and seller are aware of the reasons for the credit and have agreed in advance to the amount. From the lender’s perspective, a credit toward the buyer’s settlement costs is all that is needed.

This technique is a win-win for both parties. Sellers can often sell their properties more quickly and without making costly repairs ahead of time. Buyers have help getting into the home and have complete control over the repairs. This is particularly appealing for cosmetic repairs, where personal tastes can make a real difference in long-term satisfaction.

Marcus McCue is vice president of sales for Guardian Mortgage, which has financed dozens of East Dallas homes, and enjoys mentoring homebuyers to become smart borrowers. Follow Guardian on Facebook for a free e-book on mortgage strategies.


  1. Debbi Brown

    This article was very helpful to me. I own an older home that does need some updates. I am considering selling in a year or two and this article shows that other than updating the home myself I have other options that I can offer to a potential buyer.

  2. Robyn DiPasquale

    Great article! I’ve beem dreaming of buying and remodeling an older home for years. It’s good to know what I might be getting into!

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