Buying a home involves various fees known as closing costs, typically ranging from 2% to 5% of the purchase price. A closing cost credit is a negotiated amount the seller or lender agrees to pay on behalf of the buyer to reduce these costs at closing. This credit directly lowers the funds a buyer must bring to finalize the mortgage.
Seller Credits (Seller Concessions)
A seller credit is when the home seller agrees to pay some portion of the buyer’s closing costs to make the purchase more attractive or to assist buyers with limited cash upfront. For example, if your closing costs are $10,000 on a $400,000 home, negotiating a $6,000 seller credit means you only need to cover $4,000 at closing. Sellers usually adjust the home price accordingly, so it’s a trade-off rather than free money.
Lender Credits
Mortgage lenders may offer lender credits by covering closing costs in exchange for a higher interest rate on the loan. For example, a lender might offset $5,000 in closing costs by increasing your interest rate from 6.5% to 6.8%. This lowers your upfront cash needs but increases your monthly mortgage payments and total interest paid over time. This option often suits buyers needing immediate relief but comfortable with long-term costs.
| Feature | Seller Credit (Seller Concession) | Lender Credit |
|---|---|---|
| Provider | Home seller | Mortgage lender |
| Goal | Help close sale, assist buyer upfront | Reduce buyer’s upfront cash requirement |
| Trade-off | Possibly higher sales price | Higher loan interest rate |
| Best for | Buyers wanting lower interest and modest upfront help | Buyers needing cash relief with manageable payment increases |
Limits on Closing Cost Credits
Lenders and government loan programs limit closing cost credits to prevent inflated home prices. Typical limits include:
- Conventional Loans: 3%–9% of purchase price depending on down payment
- FHA Loans: Up to 6%
- VA Loans: Up to 4%
- USDA Loans: Up to 6%
Always check with your lender for specific limits. Exceeding them can delay or void your loan approval.
Tips to Avoid Common Pitfalls
- Understand that credits reduce your upfront cash but may increase your loan cost or home price.
- Calculate long-term effects, especially if taking lender credits with higher interest rates.
- Work with experienced real estate agents and loan officers to negotiate credits within allowed limits.
FAQs
Can closing cost credits be used for my down payment? No, credits apply only to eligible closing fees, not down payments.
How do I request a closing cost credit? Include it as part of your purchase offer negotiation, with guidance from your agent.
Are closing cost credits taxable? Generally not; the IRS treats seller credits as a purchase price adjustment rather than taxable income.
For more details on mortgage closing costs, see our article on Mortgage Closing Costs and understand your settlement documents through Closing Disclosure.
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