A credit when buying a house is money applied at closing that lowers the cash you need to bring to the table. It comes from one of two places: the seller, who redirects part of their sale proceeds toward your settlement charges, or the lender, who covers some of those charges in exchange for a higher interest rate. Either way, the money flows through escrow and reduces your closing costs line by line. It does not land in your bank account, and it cannot be used for your down payment.
Seller Credits and Lender Credits Are Not the Same Thing
Seller credits are the more common of the two. During negotiations, the seller agrees to put part of their proceeds toward your closing costs instead of keeping the full sale price. This often comes up in a first offer (full price in exchange for a credit) or after an inspection reveals repair issues. The credit is a price concession in a different form, and it does not change your loan terms.
Lender credits work on a different mechanism. Your lender pays some or all of your upfront closing costs, and in return you accept a higher interest rate on the loan. Under federal disclosure rules, these are formally called “lender credits” and appear on both your Loan Estimate and Closing Disclosure.1Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs You might take 7.25% instead of 6.75% to get a few thousand dollars toward closing. The lender recovers that money over the life of the loan through added interest.
Both reduce what you pay on the day you sign. But a lender credit costs you more over time, while a seller credit is a one-time price adjustment that leaves your rate alone.
What a Credit Can and Can’t Pay For
Credits pay closing costs. They do not pay your down payment. That rule holds across every major loan program. Fannie Mae prohibits interested party contributions from funding a borrower’s down payment or meeting minimum contribution requirements.2Fannie Mae. Interested Party Contributions (IPCs) FHA applies the same restriction: seller contributions cannot go toward the borrower’s minimum required investment.3U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower Lenders enforce it because they want to see that you have your own money committed to the property.
Within that boundary, a credit can be applied to:
- Origination fees charged by the lender for processing and underwriting
- Appraisal and inspection fees
- Title insurance and title search fees
- Recording fees paid to the local government
- Prepaid items such as the initial escrow deposit for property taxes and homeowners insurance
- Discount points to permanently buy down your interest rate
On FHA loans, the allowable list also includes temporary and permanent interest rate buydowns, prepaid mortgage interest, and the upfront mortgage insurance premium.3U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower Every one of those items draws from the same cap, so if you’re near the ceiling you’ll need to decide which costs matter most.
How Much Credit You Can Receive
Every loan program limits how much the seller or other interested parties can contribute. The caps are calculated against the sale price or appraised value, whichever is lower.
Conventional Loans (Fannie Mae)
Fannie Mae ties the cap to your loan-to-value ratio, which moves inversely with your down payment:
- Down payment under 10% (LTV above 90%): maximum 3% credit
- Down payment of 10% to 25% (LTV 75.01% to 90%): maximum 6% credit
- Down payment above 25% (LTV 75% or less): maximum 9% credit
Anything above these limits is reclassified as a sales concession and deducted from the sale price before the lender calculates your LTV, which can shift your loan terms or disqualify you from the program.2Fannie Mae. Interested Party Contributions (IPCs)
FHA Loans
FHA uses a flat 6% cap regardless of down payment. Contributions over 6%, or over your actual closing costs, are subtracted dollar-for-dollar from the sale price before the lender applies the LTV ratio.3U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower
VA Loans
VA loans treat this differently from every other program. The VA places no limit on how much the seller can contribute toward your actual closing costs. A seller can pay 100% of your origination fees, title charges, and recording fees without triggering any cap. The 4% limit applies only to “seller concessions,” which the VA defines as items of value added to the transaction beyond closing costs. Concessions include credits toward the VA funding fee, paying off a buyer’s debts, prepaid hazard insurance, and temporary rate buydowns.4Veterans Affairs. VA Funding Fee And Loan Closing Costs Confusing the two buckets is one of the most common mistakes in VA transactions and can leave thousands of dollars unused.
USDA Loans
USDA Rural Development loans allow seller contributions up to 6% of the sale price. The contributions have to go toward eligible loan purposes outlined in the program handbook.5U.S. Department of Agriculture. HB-1-3555 Chapter 6 Loan Purposes
A Credit Can’t Exceed Your Actual Closing Costs
This is where buyers often lose money. A credit cannot exceed your actual closing costs, regardless of what the contract says. If you negotiated a $12,000 seller credit but your closing costs total $9,000, you do not get the extra $3,000 as cash or as a principal reduction. The credit shrinks to match your actual costs, and the balance reverts to the seller.
On conventional loans, Fannie Mae requires financing concessions to be equal to or less than the sum of the borrower’s closing costs. Amounts above that are treated as sales concessions and deducted from the property’s sale price for LTV calculations.2Fannie Mae. Interested Party Contributions (IPCs) An oversized credit can effectively lower the property value in the lender’s eyes and change your eligibility. Get a detailed closing cost estimate from your lender before you fix a credit number in the contract.
Using a Credit for a Rate Buydown
A frequent use for a seller credit is funding a temporary rate buydown, most often the 2-1 structure. Your rate drops 2 percentage points in the first year and 1 point in the second, then returns to the permanent rate for the rest of the term. The cost usually runs 2% to 3% of the loan amount and is paid at closing from the credit.
Buydown funds count against the contribution cap. Fannie Mae requires buydown funds to be included in the IPC calculation.2Fannie Mae. Interested Party Contributions (IPCs) If you’re putting down less than 10% on a conventional loan with a 3% cap, a 2-1 buydown can swallow your entire credit allowance before touching any other closing costs. On a VA loan, a temporary buydown falls into the concessions bucket under the 4% cap, not the unlimited closing-costs bucket.4Veterans Affairs. VA Funding Fee And Loan Closing Costs
Large Credits Can Affect the Appraisal
A credit does more than reduce your closing math. When an appraiser evaluates comparable sales, they adjust for concessions that influenced those sale prices. Market value is defined as a price “unaffected by special or creative financing or sales concessions.”6Freddie Mac Single-Family. Considering Financing and Sales Concessions: A Practical Guide for Appraisers The adjustment is not strictly dollar-for-dollar; it depends on how the local market reacts to concessions. An unusually large seller credit on your transaction can prompt the appraiser to adjust the subject property’s value downward, which reduces the amount the lender will finance. Another reason to keep the credit proportional to real costs.
Tax Treatment
A seller credit is generally not taxable income to the buyer, but it can affect your cost basis and your deductions.
If the seller pays discount points to buy down your rate, the IRS treats those points as if you paid them. You may be able to deduct them in the year of purchase if you meet the requirements, but you must reduce your home’s cost basis by the amount of seller-paid points.7Internal Revenue Service. Topic No. 504, Home Mortgage Points A lower basis means a larger potential taxable gain when you sell, though most homeowners are protected by the primary residence exclusion.
Seller credits for other closing costs generally reduce your basis as well. The IRS treats rebates adjusting the sale price as items that decrease basis.8Internal Revenue Service. Basis of Assets
Negotiating the Credit
Write the credit as a specific dollar amount or a specific percentage of the sale price in the purchase agreement. Vague language such as “seller to assist with closing costs” invites disputes during underwriting and can cause a lender to reject the arrangement. Your agent should use standard contract language that spells out exact terms.
Market conditions set your leverage. In a buyer’s market, credits of 2% to 3% are often available without much resistance. In a competitive seller’s market, asking for a credit weakens your offer against buyers who are not asking. One workaround is to offer a slightly higher purchase price to offset the credit, keeping the seller’s net the same. The property still has to appraise at that higher price, or you’ll face a shortfall.
Lender credits are a separate negotiation, between you and the lender rather than you and the seller. When comparing offers, calculate how long you plan to stay in the home. A $4,000 lender credit at 7.25% versus no credit at 6.75% can be a good trade if you’re moving in five years and a bad one if you’re staying twenty.
Where Credits Show Up on Your Paperwork
Your lender must deliver a Loan Estimate within three business days of receiving your mortgage application.9Consumer Financial Protection Bureau. 12 CFR 1026.37 – Content of Disclosures for Certain Mortgage Transactions (Loan Estimate) Lender credits appear as a negative number under “Lender Credits” in Section J on page 2 and again in the Costs at Closing table on page 1.1Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs
Before closing, you receive the Closing Disclosure, the final accounting of your transaction.10Consumer Financial Protection Bureau. What Is a Closing Disclosure Seller credits and lender credits appear in the calculations section, subtracted from total closing costs to produce your cash-to-close figure. Specific lender credits sit in the “Paid by Others” column next to the cost they offset; general lender credits appear as a lump sum. Seller credits appear on both the buyer’s and seller’s sides of the ledger, lowering the seller’s net and your out-of-pocket by the same amount.
At signing, verify that every credit matches the purchase contract and your rate lock confirmation. Errors are more common than people expect, and they are far easier to fix before you sign than after the funds are wired.