How Much Seller Credit Can You Actually Get?

Seller credits are a common financial adjustment in real estate transactions, allowing a seller to contribute funds toward a buyer’s expenses at closing. This arrangement can reduce the amount of cash a buyer needs to finalize a home purchase. While these credits can make homeownership more accessible, their application is subject to specific rules and limitations based on the type of loan involved.

What Seller Credits Cover

Seller credits are typically applied to legitimate closing costs and prepaid items that a buyer incurs during a real estate transaction. These can include a range of fees such as loan origination fees, which lenders charge for processing the mortgage, and appraisal fees that cover the cost of valuing the property. Other common expenses that seller credits can cover are title insurance premiums, ensuring clear property ownership, and escrow fees for managing closing documents and funds.

Additionally, seller credits may be used for specific prepaid expenses like property taxes and homeowner’s insurance premiums, which are often collected at closing to establish an escrow account. Buyers can also use these credits to pay for discount points, which are upfront fees paid to the lender to reduce the interest rate on the mortgage loan. However, it is important to note that seller credits cannot be used for the buyer’s down payment, nor can they directly reduce the loan principal. They are specifically intended to offset transaction costs.

Limits on Seller Credits

The maximum amount of seller credit a buyer can receive is primarily determined by the type of loan they are obtaining, along with the specific guidelines set by the lender. These limits are typically expressed as a percentage of the home’s sales price or the loan amount. It is important to understand that the seller credit cannot exceed the total amount of the buyer’s legitimate closing costs and prepaid expenses. Furthermore, seller credits cannot be used to inflate the sales price beyond the property’s appraised value.

Conventional Loans

For conventional loans, the limits on seller contributions depend on the buyer’s loan-to-value (LTV) ratio and the property’s occupancy type.
For owner-occupied primary residences, if the down payment is less than 10%, the seller can contribute up to 3% of the sales price.
If the down payment is between 10% and 24.99%, the limit increases to 6% of the sales price.
For down payments of 25% or more, the seller can contribute up to 9% of the sales price.
Investment properties have a lower limit, typically capped at 2% of the sales price, regardless of the down payment amount.

FHA Loans

FHA loans have a limit of 6% of the home’s sales price for seller contributions. This 6% limit applies regardless of the down payment amount. If seller contributions exceed this 6% limit, the loan amount must be reduced dollar-for-dollar by the excess amount.

VA Loans

VA loans allow sellers to pay for all of the veteran’s reasonable and customary closing costs without any specific percentage limit. Beyond these standard closing costs, VA loans allow for additional “seller concessions” up to 4% of the loan amount or the home’s reasonable value. These concessions can cover items like the VA funding fee, prepayment of property taxes or insurance, or even paying off a buyer’s debts.

USDA Loans

For USDA loans, which support rural homeownership, the maximum seller contribution is generally 6% of the home’s purchase price. Individual lenders may impose stricter “overlays” or additional requirements beyond these general agency guidelines, which could further limit the amount of seller credit allowed.

Negotiating and Documenting Seller Credits

The process of securing seller credits begins during the offer or negotiation phase of a real estate transaction. Buyers, often with the assistance of their real estate agents, can request seller credits as part of their initial offer or subsequent counteroffers. This negotiation might occur, for example, if a home inspection reveals unexpected repairs are needed, where a credit can be requested in lieu of the seller performing the repairs. It is also a common strategy to make a home more financially attractive to a buyer with limited upfront funds.

Once agreed upon, the specific amount of the seller credit must be formally written into the purchase agreement or sales contract. Clear and precise language is essential to ensure both parties understand the terms. This contractual agreement then informs the buyer’s lender about the credit. The lender will review the requested credit to ensure it complies with the specific loan program’s guidelines and limits.

The agreed-upon seller credit will be reflected on key loan documents provided to the buyer. It will appear on the Loan Estimate (LE), provided early in the loan process, and later on the Closing Disclosure (CD), a final document issued at least three business days before closing. On the Closing Disclosure, the seller credit is clearly itemized, reducing the total cash the buyer needs to bring to the closing table. At the final settlement, the seller’s contribution is applied directly to the buyer’s closing costs.