When buying a home, closing costs can add thousands to your upfront expenses. These costs include loan origination fees, appraisal costs, title insurance, and other fees necessary to finalize the purchase. To ease this burden, buyers often use lender credits or seller credits, which reduce the amount of cash required at closing but function differently.
Lender Credits are offered by your mortgage lender to help cover closing costs in exchange for a slightly higher mortgage interest rate. This means you pay less at closing but more interest over the life of the loan. For example, if your lender offers a 0.25% higher interest rate for a $4,000 credit toward closing costs, you’ll save that amount upfront but pay more monthly until the loan is paid off. This option suits buyers who need cash now and plan on moving or refinancing within a few years.
Seller Credits are negotiated concessions from the home seller that cover some of your closing costs or prepaid items like property taxes or homeowners insurance. This credit doesn’t increase your loan’s interest rate and directly reduces the cash you need at closing. Seller credits help sellers avoid lowering the home’s sale price while still aiding buyers with upfront costs. The allowed amount depends on your loan type; FHA loans, for example, allow up to 6% of the sale price, VA loans up to 4%, and Conventional loans between 2% and 9%, depending on down payment.
| Feature | Lender Credits | Seller Credits |
|---|---|---|
| Source | Mortgage lender | Home seller |
| Effect on Interest Rate | Usually higher interest rate | No effect |
| Negotiation | With lender | With seller via agent |
| Limits | Based on lender’s pricing | Set by loan program |
| Impact | Lowers upfront cash, raises long-term costs | Lowers upfront cash, no long-term cost increase |
Understanding these credits is crucial. For instance, relying on lender credits means weighing the upfront savings against paying more interest over time. Meanwhile, seller credits do not affect your loan terms but may be limited by loan rules.
Keep in mind, neither lender credits nor seller credits are typically taxable income. Also, they’re not applicable toward your down payment but can cover most non-recurring closing costs. For more details on closing costs, see our Mortgage Closing Costs glossary.
Tips for Buyers:
- Negotiate seller credits during home purchase offers.
- Consult your lender about lender credit options.
- Compare scenarios to decide which credit suits your financial goals.
- Be aware of your loan type’s limits on seller contributions.
For additional guidance on seller contributions, visit our article on Seller-Paid Closing Costs Disclosure. For insights into various loan rate options affecting lender credits, see Rate Sheet (Lender).
Trusted sources include the FHA Single Family Housing Policy Handbook, Fannie Mae Selling Guide, and the Department of Veterans Affairs Lender Handbook. For official information on closing costs, visit the Consumer Financial Protection Bureau.
Choosing between lender and seller credits depends on your financial situation, how long you plan to keep the home, and your cash availability at closing. Understanding their differences can help you save money and make your home purchase more affordable.