Buying a home involves many upfront costs including the down payment and various closing expenses. One way to ease that financial burden is through seller-paid points, where the seller agrees to pay mortgage points on behalf of the buyer at closing. These points are fees paid to the lender to lower the buyer’s interest rate (discount points) or cover loan origination costs (origination points), ultimately lowering monthly payments.
How Seller-Paid Points Work
Mortgage points typically cost 1% of the loan amount per point and can buy down your interest rate, reducing your monthly mortgage payment. With seller-paid points, the seller credits the buyer this amount at closing, helping the buyer avoid paying those fees upfront. While the lender receives these fees, the buyer benefits from a permanently lower interest rate for the term of the loan.
Example Scenario
Suppose you’re financing $350,000 on a $400,000 home. Your lender offers a 7.0% interest rate, but for one discount point ($3,500), the rate drops to 6.75%. Instead of paying that $3,500 yourself, you negotiate for the seller to cover it. This reduces your monthly payment without needing extra cash upfront, and the seller’s contribution acts as an alternative to a direct price reduction.
Why Sellers Agree to Pay Points
Sellers may pay points to make their home more attractive in competitive or slow markets, help buyers qualify by lowering monthly payments, or maintain a higher sale price for market comps instead of reducing the sale price directly. It’s a strategic move to facilitate the sale.
Limits on Seller Contributions
Seller contributions, including points, are limited based on loan type and down payment amount. For example, on conventional loans with less than 10% down, the seller can contribute up to 3% of the sale price. FHA loans allow up to 6%, and VA loans typically cap at 4% for certain concessions. These limits protect both lenders and buyers from excessive seller-paid credits.
| Loan Type | Down Payment | Maximum Seller Concession |
|---|---|---|
| Conventional Loan | Less than 10% | 3% of sale price |
| Conventional Loan | 10% – 24.9% | 6% of sale price |
| Conventional Loan | 25% or more | 9% of sale price |
| FHA Loan | 3.5% or more | 6% of sale price |
| VA Loan | Any | 4% of loan amount* |
| USDA Loan | Any | 6% of loan amount |
*For VA loans, 4% covers specific concessions like points and funding fees; other costs may be covered additionally.
Tax Considerations
From a tax perspective, buyers can typically deduct mortgage points paid by sellers on their tax returns (IRS Publication 936). However, these seller-paid points reduce the buyer’s home’s cost basis, which affects capital gains calculations when selling the property later. Sellers see their net sale proceeds reduced, which can lower capital gains tax. Consulting a tax professional is advisable for individual circumstances.
For more on mortgage points, see our article on Mortgage Points. To understand closing expenses better, visit Estimated Closing Costs. For details on loan types mentioned, explore our glossary entries on FHA Loans and VA Loans.
Sources:
- IRS Publication 936: Home Mortgage Interest Deduction (https://www.irs.gov/publications/p936)
- Consumer Financial Protection Bureau, What are seller concessions? (https://www.consumerfinance.gov/ask-cfpb/what-are-seller-concessions-en-2052/)
- NerdWallet, Seller Concessions: What They Are And How They Work (https://www.nerdwallet.com/article/mortgages/seller-concessions)
