What 'Cash Back' at Closing Really Means

As we all know, buying and selling a home comes with all kinds of offers, negotiations, and agreements. Everything from the official sales price of the home to whether the refrigerator conveys is agreed upon between the buyer and the seller. Some years ago, the idea of “cash back at closing” came onto the scene and while the idea is still around, if you’re not careful it can land you in hot water. 

History

Historically, cash back at closing was done to allow a buyer to borrow more than a home was worth. Essentially, buyers were agreeing to purchase at a rate higher than the home’s market value and then the seller would turn around and literally give the buyer liquid cash, the difference between the sales amount and the loan amount, after the title transfer.

This seemed like a great setup until everyone realized it was mortgage fraud. Lying to lenders is now a huge no-no, so much so that the Fraud Enforcement and Recovery Act was signed into law in 2009 to protect everyone involved from shady financial maneuverings. 

Today

Now, cash back at closing is done extremely carefully and with full transparency. There are still reasons to offer or ask for cash at closing as an incentive to buy. What it equates to nowadays is a closing cost credit. The most common way it’s referred to now is as a seller concession. 

Essentially, the seller is reducing the amount of liquid cash a buyer needs to have on hand to close, all in an effort to sell the home. For instance, a buyer can offer $300,000 and ask for $3,000 in concessions. Usually, a seller will counteroffer with a higher asking price of $303,000 to cover the $3,000 in concessions.

This deal offers short term relief for a buyer who is then responsible for a larger loan over time. However, only $3,000 over the life of the loan equates to mere extra dollars in a monthly payment. This may be worth it to the buyer who then has extra cash on hand in the immediate future.

To read more on what sellers concessions and cash back credits are used for, visit Realtor.com.