What Are Seller Credits When Buying a Home?

Seller credits provide financial assistance from the seller to the buyer in a home purchase. The seller agrees to pay a specific amount on behalf of the buyer, usually for closing costs or other agreed-upon expenses. These credits are a negotiated concession formalized in the purchase agreement, not a direct reduction of the home’s price. Their main function is to ease the buyer’s upfront financial burden.

Understanding Seller Credits

Seller credits benefit both parties in a real estate transaction. For buyers, they reduce out-of-pocket funds at closing, making homeownership more accessible, especially for those who have saved for a down payment but face additional expenses.

For sellers, credits can facilitate a sale, particularly in a buyer’s market or if the property has minor inspection issues. Instead of lowering the sale price, a seller can offer credits to incentivize a buyer or address repair concerns without doing the repairs. This maintains the home’s perceived value while making the deal more attractive.

While a seller credit lowers the cash a buyer needs at closing, it is a concession applied at settlement, not a direct reduction of the home’s purchase price. The purchase price might be adjusted upward to accommodate the credit, meaning the buyer finances the credit amount over the loan’s life. This can increase the total loan amount and monthly mortgage payment, though it reduces immediate cash outlay.

The decision to offer or request seller credits is often influenced by current market conditions. In a buyer’s market, where there are more homes for sale than interested buyers, sellers may be more inclined to offer credits to attract offers and expedite the sale. Conversely, in a seller’s market, where demand outstrips supply, such concessions may be less common.

What Seller Credits Can Cover

Seller credits can be applied to a variety of expenses associated with purchasing a home, helping to reduce the buyer’s upfront costs. Primarily, these credits are directed towards covering closing costs, which are fees paid at the culmination of the real estate transaction. These include charges levied by the lender, such as loan origination fees.

Other common closing costs that seller credits can cover include:
Appraisal fees, which pay for a professional valuation of the property.
Title insurance premiums, protecting against defects in the property’s title.
Attorney fees, if required in the state.
Recording fees for officially documenting the home’s purchase with the local government.
Escrow fees, associated with the neutral third party managing the transaction funds and documents.

Beyond closing costs, seller credits can also be used for prepaid expenses. These are costs that must be paid upfront at closing but cover a period extending beyond the closing date, such as property taxes and homeowner’s insurance premiums for the first year of coverage.

Another use for seller credits is to “buy down” the interest rate on the buyer’s mortgage through the purchase of discount points. One discount point costs 1% of the loan amount and can reduce the interest rate, potentially lowering the buyer’s monthly mortgage payments over the life of the loan. Seller credits cannot be used for the down payment itself, as down payments must come from the buyer’s own verified funds or approved assistance programs.

Limitations and Restrictions

Seller credits are subject to limitations and restrictions imposed by lenders and loan programs. These limits are expressed as a percentage of the home’s purchase price and vary by loan type and buyer’s down payment. The purpose of these caps is to prevent artificial inflation of home prices and ensure the buyer maintains sufficient equity in the property.

For conventional loans, the maximum seller credit is tied to the buyer’s down payment percentage. If the down payment is less than 10% of the purchase price, the credit is capped at 3%. For down payments between 10% and 25%, the limit increases to 6%. When the buyer puts down 25% or more, the seller can contribute up to 9% of the purchase price.

Government-backed loans, such as FHA and USDA loans, permit seller contributions up to 6% of the home’s sales price or appraised value. For VA loans, seller concessions are limited to 4% of the loan amount, though sellers can pay for all allowable closing costs.

In all cases, the total seller credit cannot exceed the actual closing costs and eligible prepaid expenses. If the negotiated credit amount surpasses these costs, the excess is forfeited. Lenders review proposed seller credits to ensure compliance with guidelines and confirm the credit aligns with the property’s appraised value and the buyer’s financial profile.

Including Seller Credits in the Purchase

Incorporating seller credits into a home purchase requires negotiation. These credits are not a given; they must be agreed upon by both the buyer and seller and formally documented. This negotiation often occurs during the initial offer phase or after a home inspection reveals necessary repairs, where a credit might be offered instead of physical fixes.

Once agreed, the seller credit amount is written directly into the purchase agreement or sales contract. This document specifies the credit amount, which can be a fixed dollar amount or a percentage of the purchase price. The language is subject to review by the lender.

At closing, the agreed-upon seller credit is reflected on the Closing Disclosure (CD) or the HUD-1 settlement statement. The seller credit appears as a reduction in the total cash the buyer needs to bring to the closing table.

The credit is not a direct cash payment from the seller to the buyer; instead, it is applied directly to the buyer’s eligible costs. The amount is deducted from the seller’s proceeds from the home sale. Lender approval ensures the credits comply with all applicable loan program guidelines and do not exceed limitations.