Seller credit meaning | How it works | Expenses it can cover | Lender limitations | Who benefits | FAQ
Seller credit is money that a home seller offers a buyer at closing to cover costs that are usually the buyer’s responsibility. The credit is typically 2–9% of the home’s sale price.
Sellers can offer seller credit to help attract buyers and potentially close faster. Buyers often use seller credit to buy down interest rates, cover closing costs, or make repairs. However, seller credits must meet the lender’s requirements, can’t exceed the closing costs, and may reduce the seller’s proceeds.
An experienced agent can help you negotiate seller credits to get the best outcome, whether you’re buying or selling. You can find an agent on your own, or you can use our tool to quickly compare the top agents in your area.
What is a seller credit?
A seller credit is a specific amount a seller agrees to contribute toward the buyer’s costs at closing. The amount may be fixed or a percentage.
The credit can cover some or all of the closing costs, repair costs, or other expenses, depending on lender approval. The total seller concessions can’t exceed the total closing costs.
The seller doesn't hand over cash at closing. Instead, they use part of the proceeds from the home sale to cover the agreed-on buyer’s costs.
Seller credit vs price reduction
Seller credit and price reduction are both strategies sellers can use to make a home more appealing to buyers. But they work in different ways.
A seller credit helps buyers manage up-front expenses by reducing out-of-pocket costs at closing. But the purchase price remains the same.
A price reduction lowers the home’s overall sale price. As a result, the buyer’s loan amount and monthly mortgage payments are reduced, resulting in a long-term benefit. But price reduction doesn’t lower the up-front costs at closing.
Seller concessions vs seller credit
A seller credit is a type of seller concession.
Seller concessions can be broader incentives beyond covering specific costs at closing. Concessions can include monetary and non-monetary assistance. For instance, a seller could cover the buyer’s moving costs or leave specific appliances behind.
Consider consulting your listing agent to determine what seller concessions make sense for your situation.
How do seller credits work?
Seller credits are often negotiated during the home-buying process. They are specified in the purchase agreement and on the closing statement.
Sometimes sellers may offer seller credits as part of their listing. Other times, buyers and sellers may negotiate seller credits to cover unexpected costs, like repairs revealed during the home inspection. The buyer and seller must agree on the amount and whether the credit is a percentage of the sale price or a fixed amount.
Once a buyer and seller agree on the specific seller credits, the buyer’s mortgage lender needs to approve the terms. This step ensures the seller credit meets the lender’s conditions and doesn’t exceed the limit for the buyer’s mortgage type. Either the buyer or their buyer's agent will send the terms to the lender.
The seller credit at closing is applied directly to the buyer’s expenses, reducing the buyer’s up-front costs. No cash is exchanged. The credit is taken from the home sale proceeds. The seller credit amount may not be larger than the closing costs. You can check the seller credit on the closing statement.
Example
A buyer plans to make a 20% down payment of $80,000 on a $400,000 home and finance the rest with a loan. At closing, the buyer anticipates covering about 3% of the home sale, or $12,000, in closing costs. This brings the buyer’s up-front costs up to $92,000.
To make the home sale more enticing, the seller could offer a set amount, like $6,000, to cover closing costs — dropping the buyer’s closing costs from $12,000 to $6,000. The buyer would then only need to come up with $86,000 upfront.
What can a seller credit be used for?
Seller credits can cover many monetary expenses buyers face during the home-buying process, depending on the lender’s terms and conditions.
The most common costs seller credits are used for include:
- Closing costs: Typically, buyers must pay 2–5% in closing costs. Buyers can use seller credits to pay for some or all of the closing costs, such as title insurance, loan origination, attorney, and lender fees.
- Prepaid expenses: In some cases, buyers may apply the credits to prepaid expenses like property taxes, homeowners insurance, and buy-down of mortgage interest rates.
- Home repairs: Seller credit for repairs is often offered if the home inspection reveals issues that the seller doesn’t want to fix before selling. The buyer can use the seller credit to make the repairs. This also lets them hire the repair company they want and oversee the work.
- Homeowners Association (HOA) fees: Sellers with homes in an HOA may offer seller credits to help cover the HOA fees due at closing. This approach may be especially helpful for properties that have higher-than-average HOA fees.
Lender limitations on seller credit
What's the max seller credit on a conventional loan?
According to Fannie Mae and Freddie Mac, the max seller credit on a conventional loan is 9% for a primary residence or second home with a 25% down payment.[1][2]
But what if your down payment is less? For conventional mortgages, you can receive up to:
- 3% in seller credit with a down payment of less than 10%
- 6% in seller credit with a down payment of 10–24%
- 9% in seller credit with a down payment of 25% or more
- 2% in seller credit for investment properties, regardless of the down payment
What's the max seller credit on a government-backed loan?
Government-backed loans have different seller concession limits than conventional loans. However, you’ll want to clarify what counts toward the seller concession maximum. For instance, some government-backed loans allow sellers to pay for the buyer’s closing costs without it counting toward the maximum seller concession limit.
Here are the current seller credit limits for different government-backed loans.
- FHA seller credit limit: The FHA allows a maximum of 6% in seller concessions. The percent is based on the home’s purchase price or appraised value, whichever is lower.[3]
- VA seller credit limit: A VA-backed loan allows seller concessions of up to 4% of the total home loan. But payment of the buyer’s standard closing costs aren't counted toward the 4% seller concession limit.[4]
- USDA seller credit limit: The USDA allows up to 6% in seller concessions. In some cases, the seller may also be able to pay for all the buyer’s loan-related closing costs.[5]
Who benefits from a seller credit?
✅ Buyers
Buyers who need help with up-front costs can significantly benefit from seller credits, especially first-time home buyers or those with limited cash.
The seller credits reduce the amount of cash a buyer needs at closing. As a result, the buyer can use their savings and money for other common aspects of the home-buying process, like moving expenses, new furnishings or appliances, or building an emergency fund.
Buyers may also use the credits to buy down their mortgage interest rate, resulting in lower monthly payments over the life of the loan. Buyers purchasing an older home or one that needs repairs can use the credits to cover repair costs.
🚨 Drawbacks for buyers to consider: A large seller credit may require a higher sale price, which could impact property taxes or the loan-to-value ratio. Sometimes, the buyer may save on the front end but pay a little more over time. The lender's restrictions may limit how the seller credits can be used. If the seller credits exceed what's allowable, unused portions are lost.
You may want to choose a realtor when buying who is familiar with seller credits to make sure this approach fits your situation.
✅ Sellers
Seller credits can be a good strategy for many sellers, especially those selling in a buyer’s market or selling a house that needs repairs or an older home. Sellers can offer these incentives to offset a buyer’s initial costs, which can be especially helpful for first-time home buyers.
Sellers who offer seller credit to buyers can:
- Stand out in a crowded buyer’s market
- Attract more potential buyers by lowering the buyer’s up-front costs at closing
- Close deals faster
- Avoid having to make repairs by providing seller credits instead
🚨 Drawbacks for sellers to consider: As a seller, you'll need to consider how much it costs to sell your house and what you need to earn in proceeds before offering seller credits.
Seller credits can reduce the proceeds from the sale. As a result, some sellers may raise the home's sale price to cover the credits. But the property must appraise at the higher price or this approach won't work. There may be limits on how the credits can be used due to the lender, making it less appealing to some buyers. You may want to choose a realtor when selling who is familiar with seller credits.
FAQ
When should you ask for seller credit?
You should ask for seller credit when you’re negotiating with the seller. Often, buyers ask for seller credit when unexpected issues or repairs on the home are revealed during inspection. Your agent can help you determine if asking for seller credit is right for you. Learn how to find a great agent.
How much seller credit can you get?
How much seller credit you can get depends on your type of mortgage loan, down payment amount, and lender guidelines. For example, you may be able to get 3–9% in seller credits for a conventional loan, 6% for a FHA or USDA loan, and 4% for a VA loan.
What is seller credit when buying a house?
Seller credit when buying a house is the amount of money the seller will provide the buyer at closing. This sum helps the buyer cover costs that are typically the buyer's responsibility, like their closing costs.
Can seller credit be used for down payment?
No, seller credit can't be used for down payment. A buyer must come up with a down payment from their own resources. However, seller credits can help reduce closing costs, like attorney, loan origination, and inspection fees, allowing the buyer to use their money toward the down payment.
What happens if the seller credit exceeds closing costs?
If the seller credit exceeds closing costs, see if you can find other costs to use the money for. For instance, see if you can use the extra cash toward HOA dues or property taxes.
