Seller Credit | Can the seller pay the homebuyer's closing costs?

This article explains how the seller can pay your closing costs when buying a house. You'll learn how they work, when to ask for them, and how to avoid common mistakes.

What is a seller credit?

A seller credit is money the seller agrees to contribute toward the buyer's closing costs at the time of closing. This credit helps reduce the buyer's out-of-pocket expenses when purchasing a home.

Seller credits are negotiable and must be agreed upon by both the buyer and seller. The exact terms depend on the sale agreement and the circumstances of the transaction.

Since closing costs can add up quickly, seller credits are a valuable way to offset these expenses. They benefit first-time homebuyers who may not have saved enough to cover closing costs but are ready to purchase a home.

Seller credits have limits, and lenders set rules. By the end of this article, you'll understand these limits and learn how to avoid potential mistakes when negotiating seller credits.

How does a seller closing cost credit work?

You can request a seller credit during the negotiation process. When offering to buy a home, include the amount of the seller credit in the real estate sales contract. Your real estate agent will help you prepare the sales contract and make an offer to the sellers.

• Sales Contract Explainer

While seller credits reduce immediate costs, they typically increase your loan amount. This means you'll finance the closing costs over time, which increases your loan balance and monthly payment. Keep this in mind when calculating your overall expenses.

When should I ask for a closing cost credit from the seller?

Timing and strategy are key when requesting a seller credit. It's essential to be realistic and understand the seller's position during negotiations.

Negotiating a seller's credit can be challenging in a seller's market, where demand and buyers compete. However, in a buyer's market, where there are more homes for sale than buyers, sellers may be more open to offering credits to close the deal.

Another factor is the home's condition. If the property requires repairs or updates, the seller might be more willing to provide a credit to make the sale more appealing.

Work closely with your real estate agent and lender for the best results. They can help you identify the right time to request a seller credit and provide expert advice on structuring the offer.

What expenses can sellers cover for homebuyers?

Sellers can agree to pay some or all of your closing costs. The sales contract must state that the seller credit will pay the buyer's closing costs. The contract includes a section where you or your real estate agent will specify the credit amount.

What are closing costs?

Closing costs are expenses tied to your loan and the home purchase. These typically include:

• Loan Costs: Fees for underwriting, property appraisals, and title services.
• Other Costs: Taxes, government fees, and prepaid items like homeowner's insurance and property taxes.

Closing costs can add up to several thousand dollars depending on the property location and the lender.

For more details on closing costs, check out our Loan Estimate Explainer or use our Mortgage Calculator to estimate rates, payments, and closing costs anytime.

Can I use a seller credit for the down payment?

No, you cannot use a seller credit to cover the down payment when buying a home.

What is the down payment?

The down payment is the money you contribute toward the home's purchase price. It shows your commitment to the purchase and must come from a legitimate source, such as savings or a gift. Lenders require documentation like bank statements or gift letters to verify the funds.

The required down payment amount depends on the type of loan you're using. For example, a conventional loan requires a minimum down payment of 3%.

Understanding cash-to-close

The total amount you need to buy a home, or "cash-to-close," includes your down payment plus closing costs:

• Down Payment + Closing Costs = Cash-to-Close

Important rules about seller credits

• Seller credits cannot exceed the actual closing costs.
• If the credit amount exceeds the closing costs, you cannot apply the unused portion toward the down payment.

To avoid these situations, get pre-approved for a mortgage before negotiating seller credits. A pre-approval with NewCastle Home Loans gives you an accurate estimate of your closing costs, helping you negotiate smarter and avoid costly mistakes. You can also use our Mortgage Calculator to explore rates, payments, and closing costs anytime.

Can I use a seller credit to pay for repairs or improvements?

You cannot use seller credits to pay for repairs or improvements. Lenders only allow seller credits to cover closing costs.

This matters because lenders call credits for repairs and improvements "repair credits" and treat them differently than closing cost credits. The lender will lower the sales price by the amount of the repair credit, not your closing costs.

To avoid complications, always classify seller credits as closing cost credits in the sales contract. Work with your real estate agent and lender to ensure the language is correct.

For expert advice, contact NewCastle Home Loans. We'll help you structure the deal to minimize out-of-pocket costs and make the home-buying process smoother.

Seller credits for minor property repairs

Suppose the property requires minor repairs, such as painting or cleaning. In that case, you can negotiate a seller credit to help make the purchase more appealing. Here's how to handle the situation effectively:

Suppose the property requires minor repairs, such as painting or cleaning. In that case, you can negotiate a seller credit to help make the purchase more appealing. Here's how to handle the situation effectively:

Negotiate a seller closing cost credit.

In the sales contract, always label the credit as a "seller closing cost credit," not a "repair credit." This ensures that the credit reduces closing costs without impacting the loan calculation.

Keep the credit within closing cost limits.

Confirm that the seller credit is equal to or less than your total closing costs. If the credit exceeds the closing costs, the excess cannot be used and may be forfeited.

Check the property's condition.

Talk to your real estate agent and the lender to ensure the property's condition is acceptable for loan approval. The lender may require certain repairs if the home has defects affecting safety, soundness, or structural integrity.

Ensure the seller will complete repairs before closing.

If the sellers agree to fix issues related to the property's condition, confirm they complete the repairs before closing to avoid delays or complications.

By following these steps, you can effectively negotiate a seller credit while ensuring the property meets the necessary standards for your mortgage. For guidance on structuring your offer, contact NewCastle Home Loans. We'll help you navigate the process and reduce your out-of-pocket expenses.

• FHA 203k home renovation loan

How much can the seller pay toward my closing costs?

The amount a seller can contribute to your closing costs depends on the loan type, down payment, and whether you plan to live in the property. Remember that a seller credit cannot exceed your closing costs.

Conventional loans

For conventional loans, seller contribution limits vary based on the down payment percentage:

• Less than 10% down: The seller can pay up to 3% of the purchase price.
• 10% down: The seller can pay up to 6% of the purchase price.
• 25% or more down: The seller can pay up to 9% of the purchase price.

FHA and USDA loans

For FHA loans, the seller can contribute up to 6% of the purchase price toward your closing costs.

VA loans

For VA loans, the seller can contribute up to 4% of the purchase price for closing costs. In addition, the seller can provide unlimited funds for specific fees, such as:

• Discount points
• Origination costs
• Appraisal fees
• Survey costs
• Credit report fees

The appraised value rule

The appraised value can limit the seller's credit. Lenders base the loan amount on the lesser of the sales price or the property's appraised value.

The seller's credit must align with the appraised value. It cannot exceed the allowable contribution limits for your loan type.

Consult with your lender for accurate guidance on how much seller credit you can negotiate. NewCastle Home Loans can help you understand the rules and plan your financing to reduce upfront costs.

What if the seller's credit exceeds the closing costs?

Lenders will not allow you to keep the extra amount if the seller credit exceeds your closing costs. In this case, here are your options.

Reduce the credit amount.

The lender may ask you to lower the seller credit in the sales contract to match the actual closing costs.

Adjust the sales price.

The lender might lower the property's sales price by the excess amount if the credit is not reduced.

Return the excess to the seller.

As a last resort, the lender may require you to return the excess credit to the seller at closing.

Lenders will only allow the seller's credit to cover your closing costs, not your down payment. You can't use excess credit to reduce your down payment, which must come from your funds or an approved source.

How do I estimate closing costs?

Estimating closing costs can be challenging, especially for first-time homebuyers.

These costs vary based on the property location, sales price, and lender. While some suggest estimating between 2% and 5% of the loan amount, this range can be highly inaccurate.

For example, on a $400,000 loan, the difference between 2% and 5% is $12,000.

To get a better estimate, follow these steps:

Use online calculators.

Try tools like our interactive Mortgage Calculator to view current rates and closing costs. You can adjust the purchase price, down payment, and loan type to explore different scenarios and find the best option.

Understand standard closing costs.

Review tools like our Loan Estimate Explainer to break down typical closing costs and demystify mortgage terminology. They can help you make informed decisions when comparing loan options.

Talk to a home loan expert.

Speak with a local lender who can provide personalized guidance. They'll help you understand the specific costs and walk you through the steps to start confidently. You can schedule a consultation with NewCastle Home Loans today for accurate advice tailored to your needs.

Seller credit mortgage calculator

The seller credit calculator will help you estimate the maximum amount a property seller can pay toward your closing costs.

First, enter the property's purchase price, estimated closing costs, type of loan, and down payment as a percentage of the purchase price. 

Then, calculate the maximum seller credit.

• Loan-to-Value | How to calculate LTV for a mortgage

Remember that the real estate sales contract should clearly state any seller credit. Work closely with your real estate agent and lender to follow all necessary guidelines and procedures.

Get a closing cost quote from our interactive mortgage calculator. View current mortgage rates and closing costs to know what to expect when buying a home.