What Is a Sellers Credit When Buying a Home?
Understand seller credits: a key financial tool in home buying that reduces your out-of-pocket closing costs for a smoother transaction.
A seller credit, also known as a seller concession or interested party contribution, is a financial arrangement where the seller contributes funds towards the buyer’s expenses at closing. This mechanism helps reduce the amount of cash a buyer needs to bring to the closing table, making homeownership more accessible.
Understanding Seller Credits
A seller credit represents a negotiated financial contribution from the home seller towards the buyer’s closing costs or prepaid expenses. Funds are not given directly to the buyer as cash but are applied at closing to offset specific fees. The credit is a concession agreed upon during negotiations, and it does not reduce the actual purchase price of the home. Sellers often agree to these credits to incentivize a sale, especially in market conditions where buyers have more leverage. This approach benefits buyers who may have sufficient funds for a down payment but limited cash for additional upfront expenses.
Permitted Uses of Seller Credits
Seller credits cover eligible expenses associated with home purchase. These primarily include closing costs, fees paid to third parties for transaction services, such as loan origination, appraisal, title insurance, attorney, recording, and escrow fees. Credits can also be used for prepaid items, expenses paid at closing for costs accruing after the closing date, like property taxes, homeowners insurance premiums, and mortgage interest. Seller credits cannot be used for the down payment or to directly reduce the home’s purchase price. This restriction helps prevent artificial inflation of the sale price or loan amount.
Lender and Loan Type Limitations
Maximum seller credit amounts are subject to lender limits, varying by loan type and loan-to-value (LTV) ratio. These limits are typically expressed as a percentage of the lesser of the home’s sales price or its appraised value.
Conventional loans: Limits depend on the buyer’s down payment: up to 3% for less than 10% down, 6% for 10-25% down, and 9% for 25% or more. Investment properties have a 2% limit.
Federal Housing Administration (FHA) loans: Cap seller contributions at 6% of the sales price.
Department of Veterans Affairs (VA) loans: Sellers can contribute up to 4% of the home’s value in concessions, plus cover all reasonable loan-related closing costs.
United States Department of Agriculture (USDA) loans: Permit seller contributions up to 6% of the purchase price.
These limits are in place to mitigate risks for lenders and prevent artificial inflation of home prices.
Incorporating Seller Credits into the Transaction
Incorporating seller credits begins during the home purchase negotiation phase. Buyers, often with their real estate agent, can propose a seller credit as part of their initial offer or during counter-negotiations. Once agreed upon, the specific amount must be clearly documented within the purchase agreement or sales contract. The buyer’s mortgage lender reviews the agreed-upon credit to ensure compliance with loan type limitations and regulations; this lender approval is a necessary step before closing. On the Closing Disclosure (CD), the seller credit appears as a reduction in the total cash the buyer needs to bring to close the transaction, directly reducing out-of-pocket expenses for eligible costs.