When you buy a house, credits are dollar-for-dollar reductions in the cash you owe at closing, and they come from one of two places: the seller or the lender. A seller credit (also called a concession) shifts part of your closing costs onto the person selling you the home. A lender credit covers some of those costs in exchange for a slightly higher interest rate. Both are capped, both show up on your Closing Disclosure, and neither reduces the purchase price or the loan itself. Understanding how credits work when buying a house can save you several thousand dollars and keep a last-minute surprise from derailing your settlement.
What Credits Actually Reduce
Credits offset closing costs, not the price of the house. Closing costs typically run between 2 and 5 percent of the purchase price and cover the fees required to finalize the mortgage and transfer the title: origination charges, title insurance, the appraisal, recording fees, and prepaid items like property taxes, homeowners insurance, and mortgage interest that fund your escrow account. On a $350,000 home, that pool of fees can run from $7,000 to $17,500 on top of your down payment.1Fannie Mae. Closing Costs Calculator
A credit chips away at that number. It does not shrink your loan, and it does not come back to you as cash if it exceeds what you owe at the table.
How Seller Credits Work
A seller credit is simply an agreement, written into the purchase contract, that the seller will pay some of your closing costs out of their sale proceeds. Buy a home for $400,000 with a $10,000 seller credit and the seller nets $390,000 (before their own costs) while $10,000 goes toward your settlement charges. The credit can be a flat dollar figure or a percentage of the price.
There are two natural moments to ask for one: when you submit your offer, and after the home inspection. If an inspection surfaces a problem, a seller may prefer to credit you the estimated repair cost rather than arrange the work before closing. Whatever you agree to goes into the purchase agreement and gets submitted to the lender.
What a Seller Credit Can’t Do
Seller credits are restricted to legitimate closing costs and prepaid items. Fannie Mae prohibits using seller contributions to fund your down payment, satisfy a minimum borrower contribution, or pad your financial reserves.2Fannie Mae. Interested Party Contributions (IPCs) You also can’t pocket a leftover credit. If the amount negotiated turns out to be larger than your actual closing costs, the excess is either forfeited or applied to your loan balance. No refund check.
How Lender Credits Work
A lender credit flips the dynamic. The lender pays some of your closing costs, and in return you accept a higher interest rate for the life of the loan. You save upfront and pay more each month.
Lenders quote this tradeoff in points, where one point equals one percent of the loan amount.3Consumer Financial Protection Bureau. How Should I Use Lender Credits and Points (Also Called Discount Points)? On a $300,000 loan, one point is $3,000. Accept a rate above the lender’s base and the lender may offer you a credit worth one or more points toward your closing costs; the lender recoups the money through the extra interest you pay over time.
On your paperwork, a lender credit shows up as a negative number in Section J of the Loan Estimate and the Closing Disclosure, directly reducing the total due at settlement.4Consumer Financial Protection Bureau. Compare and Negotiate Your Loan Offers
Finding Your Break-Even Point
The question that decides whether a lender credit is worth it is how long you plan to keep the loan. A higher rate costs you more every month, so at some number of months the upfront savings get eaten up by the extra payments. Divide the credit by the additional monthly cost of the higher rate to find that break-even month. Sell or refinance before then and the credit saves you money. Stay well past it and you’d have been better off paying the costs upfront.
Ask each lender to quote two scenarios — one with credits, one without — and run the math across the shortest, most likely, and longest periods you might hold the mortgage.5Consumer Financial Protection Bureau. Select the Kind of Loan That Fits Your Needs
How Much the Seller Can Credit You
Every major loan program caps what the seller and other “interested parties” (the agent, the builder, anyone with a financial stake in the sale) can contribute. Push past the cap and the excess is treated as a reduction to the sale price, which can throw off the appraisal and the loan approval. Match your request to your loan type.
Conventional Loans
Fannie Mae ties the cap to your loan-to-value ratio. The larger your down payment, the more the seller can contribute:2Fannie Mae. Interested Party Contributions (IPCs)
- LTV above 90% (down payment under 10%): 3% of the purchase price or appraised value, whichever is lower
- LTV of 75.01% to 90% (down payment of 10% to 24.99%): 6%
- LTV of 75% or less (down payment of 25% or more): 9%
- Investment properties: 2%, regardless of LTV
FHA Loans
The Federal Housing Administration allows interested parties to contribute up to 6 percent of the sales price toward closing costs, prepaid items, and discount points. That cap does not scale with your down payment.6U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower
VA Loans
On a VA-backed mortgage, the seller can contribute up to 4 percent of the home’s reasonable value. VA concessions are defined broadly and can include the VA funding fee, debt payoff, and prepayment of hazard insurance.7Veterans Affairs. VA Funding Fee and Loan Closing Costs
USDA Loans
The USDA’s Single-Family Housing Guaranteed Loan Program caps seller concessions at 6 percent of the sales price. A 2024 exemption excluded real estate commission fees from that cap, so the 6 percent limit applies only to concessions directed at the buyer’s financing and closing costs.8USDA Rural Housing Service. 2026 USDA Explanatory Notes – Rural Housing Service
Where Credits Show Up at Closing
Your lender has to deliver the Closing Disclosure at least three business days before settlement.9eCFR. 12 CFR 1026.19 – Certain Mortgage and Variable-Rate Transactions That’s where every credit becomes concrete. Seller credits appear in the Summaries of Transactions section. Lender credits appear as a negative number in Section J on page 2. Both reduce the “Cash to Close” figure you’ll wire or bring as a cashier’s check.
Put the Closing Disclosure next to the Loan Estimate you got when you applied, and match every credit line for line. If a number moved or a credit vanished, call your loan officer before settlement. The three-day window exists precisely so you can catch mistakes.10Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs
Tax Side Effects
Seller credits are not taxable income to you as the buyer, but they can touch your taxes in two ways.
If the seller pays discount points on your behalf, you may be able to deduct those points as mortgage interest in the year of purchase. You also have to reduce your home’s cost basis by the amount of those seller-paid points.11Internal Revenue Service. Publication 551 – Basis of Assets
If the seller covers your share of property taxes from the sale date forward, you can still deduct those taxes, but you reduce your cost basis by that amount unless you reimbursed the seller at settlement.12Internal Revenue Service. Tax Information for Homeowners A lower basis can mean a larger taxable gain down the road, though the home-sale exclusion ($250,000 for single filers, $500,000 for married couples filing jointly) shields most sellers from paying anything on it.