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Seller credits: What they are and how they work
Are closing costs putting a cramp in your homeownership dreams? Consider a home offering a seller credit, which could help you save thousands of dollars on your next home purchase.
A seller credit is a negotiated amount a seller agrees to pay a buyer at closing — generally between 3% and 6% of a home’s sale price. But why would a homeowner chip in cash when selling their own home? In real estate markets that favor buyers, these credits can make their home sell faster by helping buyers like you cover part or all of your closing costs.
Learn more: How much money do I need to buy a house?
In this article:
Seller credit meaning
A seller credit is an agreed-upon amount of cash that a seller contributes toward a buyer’s costs when purchasing a home.
Credits can be a fixed amount or a percentage of a home’s sale price. For instance, a seller might offer a fixed seller credit of $5,000 or a 3% seller credit, which means a dollar amount equal to 3% of the home’s sale price.
At closing, no money changes hands. Instead, buyers receive a line-item credit equal to the negotiated seller credit. The credit reduces the cash that buyers need to bring to closing, which can significantly ease the path to homeownership.
Read more: Closing on a house — What to expect and how to prepare
Seller concessions vs. seller credits: Are they the same thing?
You might see the terms “seller concession” and “seller credit” used interchangeably. The terms are related but have different meanings.
A seller concession is any contribution from a seller to the buyer to offset costs related to the home purchase. These contributions can be monetary (like a seller credit to cover closing costs) or non-monetary (like a seller-paid two-year home warranty).
In a nutshell, a seller credit is one type of seller concession, but not every seller concession is a seller credit.
Why would sellers offer a seller credit?
While it might seem like a seller credit is a win for buyers alone, it often helps buyers and sellers equally. Here are some common reasons sellers may offer a seller credit to prospective home buyers.
Market conditions
Real estate has cycles, just like the stock market. That’s why you may have heard terms like “buyer’s market” and “seller’s market.”
During seller’s markets, when buyers outnumber homes for sale, sellers have the upper hand and don’t need to offer discounts or incentives to help their homes sell. When the number of homes for sale outnumbers buyers, sellers may need to entice prospective buyers to tour their homes and make an offer.
Offering a seller credit can help a seller's home rise to the top of a buyer’s list and outshine other homes on the market.
Necessary repairs
Repairs could slow the process if a homeowner wants to sell their home as quickly as possible. Instead of replacing worn carpets or fixing issues discovered during an inspection, the seller might offer a seller credit instead. A credit can keep both parties moving toward the closing table and allow buyers to decide when and by whom repairs get made.
Now that a seller credit saves you money on closing costs, you can use that money toward renovations instead.
Speed of sale
A seller credit could be helpful if the current owner needs to move for a job or wants to use the sale profits to close a deal on another home. With a seller credit, buyers save on costs, and sellers may cash out faster than they would without offering an attractive credit.
Learn more: How long does it take to close on a house?
How do seller credits work?
Some real estate listings spell out seller credits. If so, terrific. However, it is possible to negotiate one during the escrow period. Here’s a breakdown of what to expect during a home purchase transaction with a seller credit, from when you make an offer to the day you close on the house.
1. Make an offer
The offer phase is your first chance to receive a seller credit. If there’s a stated credit in the real estate listing, you can include that in your offer or propose a higher credit amount. You may also include one in your offer if the home doesn’t advertise a seller credit.
If the seller accepts your offer and agrees to the proposed seller credit, you move on to other vital parts of the home-buying process, including the appraisal and inspection.
2. Perform a home inspection
A home inspection can reveal necessary repairs that weren’t evident when you toured the property. If the seller doesn’t want the hassle of performing the required repairs, they may offer a seller credit so you can do the repairs yourself.
A seller credit for repairs offers a few notable benefits. It keeps you moving toward the closing table instead of waiting for the seller to make repairs. You also get to choose who makes the repairs and potentially pocket a bit of cash if the cost is less than the credit.
3. Receive lender approval
Once you and the seller negotiate a final seller’s credit, your real estate agent will submit the deal terms to your mortgage lender for approval. Lenders will ensure the seller's credit doesn’t exceed the limit for your mortgage type. We’ll dive into loan-specific limits in a minute, but seller credits are generally limited to between 3% and 9% of the home’s sale price on a primary residence.
4. Close on your home
When you arrive at the closing table, the seller’s credit to the buyer is listed on your loan documents. The credit reduces the money you need to bring to closing.
Say you’re looking at a $300,000 home and planning to use an FHA loan with a 3.5% down payment requirement. You also need 3% to 4% of the sales price for closing costs. In this case, you’d need to come up with $10,500 at closing for the down payment alone, plus let’s say another $12,000 (4%) for closing costs. That comes to $22,500 due on closing day. But that figure shrinks significantly with a seller credit.
If the seller offers a 3% seller credit, that’s a $9,000 discount on closing costs. Your closing costs are reduced to $3,000, so you now need $13,500 — instead of the original $22,500 — for a down payment and closing costs. This results in more money in your pocket and (we hope) a much happier home buyer.
Dig deeper: Understanding FHA loan closing costs
What can seller credits be used for?
If it’s a line item on your loan documents, you can generally use a seller credit to pay it. Some of the most common expenses that seller credits can cover include:
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Title search fees
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Mortgage origination fees
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Homeowners’ association (HOA) fees
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Property taxes
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Appraisal and inspection fees
Dig deeper: Property tax — How to calculate and pay what you owe
Are there limits on seller credits?
Seller credits do have limits, and they depend on your mortgage type. According to the National Association of Realtors, the maximum seller concessions — which include monetary and non-monetary seller contributions — usually top out between 3% to 6% of a home’s sale price, though limits vary based on the mortgage type.
Conventional loans
The maximum seller’s concession on a conventional mortgage for a primary residence depends on your down payment.
FHA loans
Contributions from sellers and other interested parties for FHA loans max out at 6% of the home’s sale price, regardless of a buyer’s down payment. Interested parties include sellers, builders, developers, and other parties with a financial interest in the transaction.
USDA loans
Guidelines for USDA loans allow seller concessions of up to 6% of the house’s sales price.
VA loans
VA loans have flexible guidelines for maximum seller concessions. Here’s how they work.
Generally, VA loans allow a seller concession of up to 4% of the purchase price. However, that 4% is in addition to negotiated seller contributions such as discount points. In reality, buyers with VA loans could enjoy seller concessions above the 4% threshold.
Learn more: The different types of mortgage loans
Seller credit FAQs
What is a credit from the seller?
A credit from the seller, also known as a seller credit, is a dollar amount a seller agrees to pay a home buyer at closing. Seller credits are most common in buyer’s markets when home supply exceeds demand. These credits can entice buyers to tour homes, make offers, and speed up a seller’s time to the closing table.
Can a seller credit be used for my down payment?
No, you cannot use a seller credit toward your down payment. You can use it for closing costs such as origination, appraisal, and inspection fees.
How much credit can you ask from a seller?
The amount you can request in seller credits varies by your type of mortgage loan. For a conventional loan, you can get a credit of 3% to 9% of the home sales price, depending on your down payment amount. FHA and USDA loans allow for 6% in seller credits, while VA loans let you acquire up to 4% in seller credits.
This article was edited by Laura Grace Tarpley.
