Seller credits and lender credits can both reduce the amount of money a homebuyer needs at closing, but they work in very different ways.
Understanding the difference can be especially important when comparing mortgage options or negotiating a purchase contract. A properly structured credit can sometimes make a significant difference in the amount of cash a buyer needs to complete the purchase.
What Is a Seller Credit?
A seller credit, sometimes called a seller concession, is an amount the seller agrees to contribute toward certain eligible costs for the buyer at settlement.
The seller credit is negotiated as part of the real estate contract and may be used toward allowable expenses such as:
- Mortgage closing costs
- Prepaid interest
- Initial escrow deposits
- Homeowners insurance
- Discount points used to reduce the mortgage interest rate
- Other eligible costs associated with the transaction
A seller credit generally cannot simply be given to the buyer as cash back at closing. The credit must be applied toward eligible costs, and any unused portion may be lost depending on how the transaction is structured.
How Much Can a Seller Contribute?
The maximum seller contribution depends on several factors, including the mortgage program, occupancy, down payment or loan-to-value ratio and the type of costs being paid.
Conventional, FHA and VA loans each have their own requirements regarding interested-party contributions and seller concessions. Because these limits and definitions can vary by loan program, it is important to determine the allowable amount before negotiating the credit in the sales contract.
There is also a practical consideration: requesting a larger seller credit than you can actually use may provide no additional benefit to the buyer.
Can a Higher Purchase Price Be Used to Create a Seller Credit?
In some situations, a buyer and seller may negotiate a higher purchase price in exchange for the seller providing a credit toward the buyer’s eligible closing expenses.
For example, instead of purchasing a home for $500,000 with no seller credit, the parties might agree to a purchase price of $505,000 with a $5,000 seller credit, assuming the loan program permits the credit and the arrangement makes sense for both parties.
However, increasing the purchase price does not automatically create additional financing. The property still needs to support the agreed-upon value, and the loan must meet applicable underwriting and appraisal requirements.
This strategy should therefore be discussed with your loan officer and real estate agent before changing the contract.
What Is a Lender Credit?
A lender credit is different from a seller credit. Rather than coming from the seller, the credit is provided through the pricing of the mortgage itself and is applied toward eligible closing costs.
Mortgage interest rates and lender credits are closely connected. In general, a borrower may have the option to accept a higher interest rate in exchange for a lender credit that reduces the amount of cash needed at closing.
The opposite can also occur: a borrower may choose to pay discount points upfront in exchange for a lower mortgage rate.
How Does a Lender Credit Work?
Suppose a borrower is comparing two interest-rate options. One option may have little or no lender credit, while another rate may provide a credit that can be applied toward eligible closing costs.
The lender-credit option may require less money at settlement but result in a somewhat higher monthly mortgage payment. Whether that tradeoff makes sense depends on the borrower’s available cash, anticipated time in the home, loan amount and overall financial goals.
There is no single rate-and-credit combination that is best for every borrower.
Seller Credit vs. Lender Credit
The simplest way to distinguish the two is:
- Seller credit: Negotiated with the seller as part of the purchase transaction.
- Lender credit: Generated through the pricing of the mortgage and generally associated with the interest-rate option selected.
Both can reduce the amount of cash a buyer needs at closing, and in some transactions they may be used together, subject to the applicable mortgage program and allowable closing costs.
Can Seller Credits Be Used to Buy Down the Interest Rate?
In many transactions, allowable seller credits can be used to pay discount points to obtain a lower mortgage interest rate. Depending on the situation and loan program, they may also potentially be used toward an eligible temporary interest-rate buydown.
This can make seller credits particularly valuable when a buyer has sufficient funds for closing but would benefit more from reducing the cost of the mortgage.
Which Type of Credit Is Better?
That depends on the transaction.
A seller credit may be particularly attractive when the seller is willing to negotiate and the buyer wants to preserve cash. A lender credit can be useful when the buyer wants to reduce upfront costs and is comfortable with the interest-rate tradeoff associated with that credit.
In some cases, the best strategy may involve comparing several combinations of purchase price, seller credit, interest rate and lender credit rather than looking at any one number by itself.
Have Questions About Seller or Lender Credits?
Seller credits and lender credits can be valuable mortgage-planning tools when they are structured correctly. Before negotiating a seller credit or selecting a lender-credit option, it is important to understand how the credit affects your cash to close, monthly payment and overall financing strategy.
Questions?
Call or text me at 240-670-5090 or email me at CJMT@mainstreethl.com.
