What Is a Buyer’s Credit in Real Estate?

A buyer’s credit in real estate is a financial arrangement where the seller provides money to the buyer at closing. This credit helps offset some of the costs associated with purchasing a home, effectively reducing the buyer’s out-of-pocket expenses. It serves as an incentive, making homeownership more financially accessible.

Understanding Buyer’s Credits

A buyer’s credit, often referred to as a seller concession or closing cost credit, is a sum of money the seller agrees to give the buyer at closing. This agreement is established during the negotiation phase of the purchase contract. The primary purpose of this credit is to assist the buyer in covering various expenses related to the home purchase, rather than directly reducing the property’s sale price. This distinction is important because the credit is applied at closing to the buyer’s costs, meaning the buyer brings less cash to the closing table.

Sellers may offer these credits for several reasons, particularly in market conditions that favor buyers. For example, a seller might offer a credit to incentivize a quick sale or to make their property more attractive in a competitive market. It can also address minor issues identified during a home inspection without the seller undertaking direct repairs before closing. Offering a credit facilitates the sale without a direct price reduction, which can be beneficial for maintaining the perceived value of the property.

Allowable Uses of Buyer’s Credits

Buyer’s credits cover various expenses incurred by the buyer during a real estate transaction. Common uses include closing costs, such as loan origination fees, appraisal fees, title insurance premiums, attorney fees, and escrow service charges.

Buyer’s credits can also be applied to prepaid expenses, including property taxes, homeowner’s insurance premiums, and homeowner association (HOA) dues due at or before closing. Credits may also be used to buy down the interest rate on the loan, known as discount points, which can lower the buyer’s monthly mortgage payments. If property inspections reveal necessary repairs, a seller might offer a credit to help the buyer cover those costs after closing.

Buyer’s credits cannot be used for the buyer’s down payment itself, nor can they directly reduce the principal loan amount. Lenders have specific rules to prevent this. If a negotiated credit exceeds the actual eligible closing costs, the excess amount is forfeited and cannot be returned to the buyer as cash.

The Impact on the Real Estate Transaction

Buyer’s credits are integrated into the purchase agreement through negotiation. The credit amount can be a fixed dollar value or a percentage of the home’s sale price. Lenders impose limitations on the maximum seller credit allowed. These limits vary based on the loan type (e.g., conventional, FHA, VA, USDA) and the loan-to-value (LTV) ratio or down payment percentage.

On conventional loans, seller contributions are capped at 3% of the purchase price for down payments less than 10%, 6% for down payments between 10% and 25%, and up to 9% for down payments greater than 25%. FHA and USDA loans limit seller credits to 6% of the sales price, while VA loans allow up to 4% of the home’s value.

The property’s appraisal is an important consideration. Lenders base the loan amount on the lesser of the sales price or the appraised value. If a seller credit causes the purchase price to exceed the appraised value, it can create an appraisal gap, which the buyer may need to cover or renegotiate. The credit is itemized on the Closing Disclosure, a document provided to the buyer before closing, showing how it reduces the cash the buyer needs at closing.

Buyer’s credits offer advantages for both parties. For the buyer, it reduces the upfront cash needed to close, making homeownership more attainable without directly impacting the down payment. For the seller, offering a credit makes their property more appealing, potentially leading to a faster sale or serving as a negotiation tool to finalize a deal without lowering the listing price.