What is a seller credit and how it helps buyers and sellers

Seller credits help homebuyers pay upfront expenses like closing costs or home repairs. This money comes from the home's seller. It's an incentive to encourage the home buyer to follow through and close the deal.

But why not just lower the purchase price of the home? And what rules do lenders, buyers, and Realtors have to follow to use seller credits?

These are good questions. Let's take a closer look. 

What is a seller credit?

With seller credits, the seller pays some home buying costs on the buyer's behalf. Seller credits typically range from 3% to 6% of the home's sale price, but they could also be fixed dollar amounts, such as $5,000 to spend on repairs or closing costs.

No cash changes hands between the buyer and the seller. Instead, the buyer receives a line-item credit that reduces out-of-pocket expenses. On a $400,000 home with a 4% seller credit, a buyer would see $16,000 applied toward closing costs, inspection fees, or approved repairs.

Seller credits often get confused with seller concessions. In reality, seller credits are a form of seller concessions. Credits aren't the only concessions a seller can make. A seller could also offer a home warranty or agree to leave furnishings and fixtures in the home, for example. 

...in as little as 3 minutes – no credit impact

How seller credits help buyers and sellers

Seller credits solve different problems for buyers and sellers, creating opportunities that benefit both parties. 

Seller credit benefits for buyers

For buyers, seller credits can ease cash flow problems. When you've saved enough for a down payment but closing costs stretch your budget too thin, a seller credit can bridge that gap.

Consider a $500,000 home with $15,000 due in closing costs. A 3% seller credit provides exactly that amount. This could be a deal maker for a buyer who didn't have $15,000 available or for a buyer who'd rather spend that $15,000 on new furniture or moving expenses.

This cash flexibility could also help with home repairs. Let's say the home inspection uncovers a $3,000 roof repair that must be done to get the home insured. A seller credit could cover this expense.

Yes, the seller could also complete the repair instead, but with seller credits, the buyer could manage the repair instead of depending on the seller to hire a contractor and schedule the work.

Seller credit benefits for sellers

For sellers, offering seller credits makes their home more attractive to buyers. In buyers' markets, seller credits usually become more common.

Yes, the seller could simply lower the home's purchase price by $5,000 instead of offering a $5,000 seller credit. But that might not help the buyer as much. Spread over a 30-year loan term, that $5,000 price reduction might amount to only a $40 to $50 savings on the monthly payment.

Many buyers prefer getting the seller credit to help lower their upfront costs instead. 

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What can seller credits be used for?

Seller credits can go toward a wide range of closing expenses, giving buyers more flexibility as they budget for upfront costs.

Many buyers apply seller credits to their closing costs, which typically range from 3% to 6% of the loan amount. For a $300,000 home loan, closing costs would range from $9,000 to $18,000. Closing costs include a variety of fees, including appraisal fees, lender fees, attorney fees, title fees, and prepaid property taxes.

Seller credits could also be used for home repairs or other upfront costs, but not for the home's down payment.

Ideally, seller credits should be negotiated into the purchase contract, but the need for credits might come up later, requiring the buyer to ask the seller for credits during the purchase process.

For buyers: When to request seller credits

Buyers should consider asking for seller credits:

• When market conditions favor buyers: When home inventory is high and homes sit longer on the market, sellers become more willing to offer incentives like seller credits. In markets where buyers get multiple offers the day the home lists, they're a lot less likely to grant seller credits.
• When they face cash flow constraints: Buyers who can qualify for the mortgage amount but struggle with closing costs can use seller credits to bridge this gap without affecting your loan approval. 
• After the home inspection: Home inspections, especially for older homes, may reveal needed repairs, such as electrical or plumbing upgrades or even foundation instability. Sellers may be more likely to grant credits for repairs since other buyers will likely come across the same problems.

Every seller is different. Some may not entertain the idea of seller credits at all; others might be glad to help in that way. Buyers who aren't sure whether or how to ask for closing credits or other seller concessions should ask their Realtor.

For sellers: Making your listing stand out

Sellers can use credits to:

• Keep the asking price while still offering value: Advertising a $5,000 seller credit can attract buyers without lowering the price.
• Create quick sale incentives: Seller credits can expand the pool of buyers by making the home more appealing to buyers who have tight budgets for upfront fees. 
• Encourage peace of mind: Offering to pay for a home warranty through seller credits can put buyers at ease when they're worried about future home repairs.

Ultimately, seller credits could sweeten the deal and help the home sell faster.

...in as little as 3 minutes – no credit impact

What seller credits can't be used for

Seller credits come with clear boundaries that sellers and buyers should understand before going under contract. Restrictions vary some by loan type which can make these limits hard to understand.

No down payment credit

Seller credits can never be applied to a down payment under any loan program. The buyer must pay the down payment from their own savings or from approved sources such as loan programs or gifts from family and friends who follow the lender's gifting rules. 

Loan-specific contribution limits

Different loan programs cap seller credit amounts differently:

• FHA loans: Seller contributions are limited to 6% of the sales price. These credits can cover interest rate buydowns, discount points, and standard closing costs. FHA guidelines remain consistent regardless of your down payment amount.
• VA loans: More restrictive at 4% of the home's reasonable value (a number determined through the VA appraisal process) VA loans exclude certain fees from this calculation, including some discount points that other loan programs allow.
• USDA loans: Cap seller contributions at 6% of the sales price, similar to FHA loans. These rural development mortgages maintain this limit to ensure you maintain genuine financial investment in your purchase.
• Conventional loans: Offer the most flexibility, with limits ranging from 3% to 9% of the sales price depending on your down payment amount (see table below for the breakdown). Investment properties face stricter limits at just 2%.

Realtors and loan officers should also be familiar with these rules and can help guide buyers and sellers who have specific questions.

5 steps for using seller credits

Here's a guide to using seller credits:

Step 1: Include in the initial offer if possible

If you know you'll need seller credits, request them upfront when you submit your offer. You can ask for them even if the listing doesn't mention credits. Many sellers will consider them. Be specific about the exact amount or percentage you need, and make this part of your purchase agreement terms.

Step 2: Get an independent home inspection

Home inspections often uncover repair needs that weren't visible during your initial walkthrough. Instead of asking the seller to fix all the problems, buyers can request additional credits to handle repairs. This lets the buyer choose contractors and control timing without having to spend cash.

Step 3: Submit contract to the mortgage lender

Your real estate agent sends the final contract terms to your lender for approval. The lender checks that your requested credits fall within program guidelines. Lenders have to follow loan program rules, so they'll make sure your offer follows guidelines. 

Step 4: Calculate final figures

Your lender provides a Closing Disclosure showing exactly how the credit affects your cash needed at closing. Review these numbers carefully. If closing costs end up lower than expected, excess credits typically can't be refunded as cash.

Step 5: Receive credit at closing

The seller credit appears as a line item on your closing statement, directly reducing what you owe. The title company handles the accounting. No money passes between the buyer and the seller. You simply bring less cash to the closing table.

FAQs about seller credits

These answers address the most common concerns that come up during negotiations and closing.

Is a seller credit the same thing as lowering the sale price?

No, seller credits work differently. They keep the original sale price the same while helping pay closing costs or other upfront expenses. Lowering the sale price reduces the purchase amount, down payment requirement, and loan size. But there are limits. The home must still appraise for the higher sale price in order for the loan to move forward.

Do seller credits come out of the seller's proceeds?

Yes, seller credits reduce what the seller receives at closing. The credit appears as a line-item deduction from the seller's proceeds at settlement. 

How much seller credit is too much?

Seller credit amount vary by home, buyer, and seller, but there are limits to consider. For example, the seller credit can't push the loan amount past the home's value. Also, loan programs will limit how much a seller can grant in credits. For conventional loans, seller credits top out at 9% of the sale price with limits as low as 3%, depending on down payment size. FHA and USDA loans allow up to 6%; VA loans limit seller credits to 4% of the home value. 

Can seller credits be used for down payments?

No, seller credits cannot be used for down payments under any circumstances. They can be applied only to closing costs, repairs, or other approved expenses. Buyers must provide their down payment from their own resources or through approved assistance programs.

Need seller credits? A mortgage preapproval can estimate your budget

Seller credits can smooth the path to homeownership, especially for first-time buyers.

Before asking for seller credits, it helps to know how much you can afford to borrow and what your interest rate, monthly payments, and fees might be.

A pre-approval can provide an estimate of those costs without requiring a commitment.

...in as little as 3 minutes – no credit impact