Seller Credit: What Is It and Why It Matters

Seller credit is a valuable tool buyers can leverage to lower their closing costs. Sellers who want to entice buyers can use seller credits to make buying their property more appealing, potentially speeding up the time frame to the closing table. Plus, seller credits may help sellers negotiate higher sales prices for their property.

In this article, we’ll discuss how buyers and sellers can use seller credits, when sellers should consider offering a seller credit and when buyers should ask for one.

What Is A Seller Credit?

A seller credit (or seller’s credit) is a type of seller concession. The seller typically provides a fixed dollar amount or a percentage of a home’s value toward closing costs. Sellers can use this strategy to motivate a buyer to purchase a property or help a buyer who can’t come up with the money to close. Seller credits range by loan type, but a seller typically contributes anywhere from 3% – 9% of a home’s appraised value.

Seller credits benefit the seller as well as the buyer. Sellers who provide credits may try to recover their value by negotiating a higher sale price. The adjustment in the sale price usually covers or exceeds the credit amount.

While “seller credit” and “seller concession” are sometimes used interchangeably, the terms have some key differences.

A seller concession can refer to various incentives or contributions a seller offers. Seller concessions can be monetary or nonmonetary and can take different forms to accommodate the needs of the buyer or the seller, including property repairs, closing cost assistance or readjusting the purchase price.

 A seller credit is a specific type of seller concession that involves a seller directly providing funds for the purchase at closing.

Which Expenses Do Seller Credits Cover?

To get the most out of a seller's credit at closing, you must understand how to use it. Here are the most common ways buyers use seller credits:

• Closing costs: Seller credits are frequently used to offset a buyer's closing costs, which can include lender fees, loan origination fees, title insurance fees, appraisal fees, inspection fees, attorney's fees and escrow fees.
• Property repairs: Sellers may provide credits to address specific repairs or issues, including roof repairs, plumbing, electrical systems or other issues a buyer would need to fix after purchasing a home, which are identified during a home inspection.
• Down payment: In some cases, buyers can use seller credits to assist with their down payment, reducing their upfront cost to purchase a home.
• Prepaid items: Seller credits can cover prepaid expenses such as property taxes, homeowners insurance or prepaid mortgage interest.
• HOA fees: Seller credits can cover a portion of a buyer's homeowners association (HOA) fees, which can be especially useful in areas where HOA fees are higher than average.

When You Should Ask for A Seller Credit

Offering seller credits is a common strategy in real estate negotiations. However, sellers and buyers capitalize on the tactic more or less depending on market conditions. Generally, sellers are less likely to offer credits in a seller’s market and more likely in a buyer’s market.

When Seller Credits Are Best For Sellers

If your property needs upgrades or repairs, you can offer a seller credit to offset those costs for the buyer, which can alleviate buyer concerns and incentivize them to purchase the home. A strategically offered seller credit can increase the marketability of a property and the likelihood of a successful sale. Without seller credit, a seller may struggle to attract buyers, potentially prolonging the time the property sits on the market.

A seller credit may be the difference between a buyer purchasing your older home or being lured away from your property by homes with more modern amenities, such as shiny new appliances and countertops. If you’re selling your older home in an area packed with more up-to-date properties, consider offering seller credits to compete with the allure of newer homes.

Seller credits are also widely used when a seller wants to close a deal quickly. The seller may have gotten a new job in a different area or wants to use the profit from the sale to cover the cost of other investments or debts. By offering seller credit, the seller has a greater chance of overcoming buyer objections, resulting in a faster turnaround.

When Seller Credits Are Best For Buyers

If you have smaller savings or are struggling to cover closing costs, a seller credit can help fast-track you to the closing table and achieve your home buying dream. Seller credits are well suited for buyers who want to maximize their home buying budget, including:

Buyers With Student Loans

Buyers with student loans often struggle to simultaneously save for a home and pay down their loans to reduce their debt-to-income ratio (DTI) to qualify for a mortgage. A seller credit can provide much-needed funds to cover closing costs and finalize the home buying process.

Buyers Eyeing Fixer-Uppers

If a home inspection uncovers significant repairs or defects, a buyer can request a seller credit to cover the repair costs. A seller credit can enable the buyer to purchase a home closer to their budget limit and still have enough money left over for repairs.

Buyers In Favorable Markets

In a buyer's market, where there is a surplus of available properties, buyers can pick and choose from an array of homes. One way to maximize that advantage is by requesting seller credits. Given the market, sellers may be motivated to offer them to attract buyers, especially if the house has been on the market for a while.

Whether you’re buying or selling a home, work closely with a real estate agent to help decide whether you can request or offer seller credit.

However, there are some limits on seller credits buyers and sellers should consider.

Limitations On Using A Seller Credit At Closing

Mortgage lenders enforce limits on seller credits to promote responsible lending practices and prevent inflated housing costs.

The limits vary depending on the loan type and the lender's policies. Here’s the maximum amount of seller credit you can use by common mortgage types:

Seller Credit For Conventional Loans

For conventional loans (backed by Fannie Mae and Freddie Mac), seller credit limits depend on the size of a buyer's down payment. Here are the lender limits on seller credit for conventional loans:

• If the down payment is less than 10%, the maximum seller credit is usually limited to 3% of the purchase price.
• If the down payment is between 10% – 25%, the limit may increase to 6% of the purchase price.
• Buyers with a down payment of 25% or higher may receive seller credits up to 9% of the purchase price.
• If the home is an investment property, seller credits are limited to 2%.

Seller Credit For Government-Backed Mortgages

For federally insured mortgages, lender limits on seller credit are specific to the government loan:

FHA Loan Seller Credit Limit

The Federal Housing Administration (FHA), a Department of Housing and Urban Development (HUD) division, provides FHA loans. The loans are attractive to borrowers who may not qualify for conventional loans. The FHA limits seller credit to 6% of the purchase price, regardless of the down payment’s size.

VA Loan Seller Credit Limit

The Department of Veterans Affairs (VA) offers the VA loan to eligible active-duty service members, specific National Guard and reservists, veterans and their surviving spouses. The loan helps veterans and their families purchase homes with favorable terms. The VA limits seller credit to 4% of the purchase price.

USDA Loan Seller Credit Limit

The U.S. Department of Agriculture provides USDA loans. USDA loans financially assist buyers interested in purchasing property in certain rural and suburban areas, helping them buy homes with favorable terms. The USDA limits seller credits to 6% of the purchase price.

Seller Credit FAQs

What is seller credit?

A seller credit is a type of seller concession. It’s a direct financial contribution the seller makes to a buyer to help cover their closing costs or other expenses associated with the home purchase.

What is an example of a seller credit at closing?

Seller credit can cover closing costs, pay for repairs and assist in other lender-approved areas. If a buyer's closing costs equal $7,000, a $5,000 seller credit would lower the buyer’s out-of-pocket expense to $2,000.

Is a seller credit a selling expense?

A seller credit isn’t typically considered a selling expense. It’s an incentive or concession a seller offers to a buyer. A seller credit is a financial adjustment that directly reduces the amount the buyer pays upfront, not an expense incurred by the seller.

The Bottom Line

Seller credit can be a powerful tool home buyers and sellers leverage to promote faster, easier, mutually beneficial transactions. For home buyers, seller credits can reduce the cost of various expenses, including closing costs, property repairs, home warranties and down payments. For home sellers, credits can help resolve disagreements over repairs and expedite a sale.

Now that you understand how seller credits work, you can confidently use them as you sell or buy a home. If you're ready to strategize your next move, start the approval process today with Rocket Mortgage^®.