Got a Big Seller Credit? Here's How to Actually Use It
By Sam Alpert, President and Mortgage Loan Originator, NMLS #1961555
A seller credit isn't cash. Here's how much a seller can give on a conventional loan, what the credit can pay for, and how we split a $50,000 credit.
A buyer of mine recently got the seller to agree to a $50,000 credit. Great negotiating. Then the real work started, because a seller credit isn't cash. There are rules about how much the seller can give and what it can pay for. If you ignore them, the money gets cut at closing or the deal gets reworked.
How much can a seller credit be on a conventional loan?
It depends on your down payment. On a conventional loan (Fannie Mae rules), seller concessions are capped at:
- Less than 10% down: 3% of the price
- 10% to under 25% down: 6%
- 25% or more down: 9%
- Investment property: 2%
The percentage is figured on the lower of the purchase price or the appraised value. FHA and VA loans have their own limits.
What can a seller credit pay for?
A seller credit can pay your costs of buying the home, but not your down payment. That includes:
- Closing costs: lender fees, title, appraisal and similar
- Prepaids: property taxes and homeowners insurance for escrow, prepaid interest
- Discount points for a permanent rate buydown
- A 2-1 buydown, which lowers the payment by 2% in year one and 1% in year two
- HOA dues, up to 12 months after closing
The credit can't be more than your actual costs.
What happens if the seller credit is over the limit?
The extra has to come off the purchase price. That's not a bad thing. A lower price means a smaller loan, a smaller down payment, and mortgage insurance that costs less and drops off sooner.
How we used a $50,000 seller credit
The buyer was putting 10% down, so the cap was 6%. The extra came off the price. The rest covered closing costs, a quarter-point permanent rate buydown, and a 2-1 buydown.
Why spread it out instead of putting it all in one place? Because nobody knows where rates are going.
- If rates come down, the buyer can refinance, and the 2-1 already covered the first years.
- If they don't, the lower price and lower permanent rate keep saving every month.
The deal doesn't need rates to drop to work.
Is a 2-1 buydown worth it?
It can be, if you'd be fine with the full payment anyway. You qualify at the full rate, not the lower year-one rate. A 2-1 is breathing room, not a way to afford a house you can't afford at the real payment. Don't buy on a promise that rates will drop.
2-1 buydown vs. permanent rate buydown: a rough example
On a loan of about $430,000 at 6.5%, a 2-1 lowers the payment by roughly $540 a month in year one and $275 a month in year two. That costs about $9,800 of the credit. Putting the same money into points or a lower price saves less per month, but it keeps saving for as long as you keep the loan. The right mix depends on how long you'll keep the loan and how tight your first two years are. (Illustrative numbers, not a quote.)
FAQ
Can a seller credit be used for the down payment?
No. It can only go toward closing costs, prepaids, points, buydowns and similar costs.
Can I get cash back from a seller credit?
No. Any amount over your costs or over the cap comes off the price.
Is the seller credit limit based on the price or the appraisal?
Whichever is lower.
Do I qualify at the 2-1 buydown rate?
No. On a conventional loan you qualify at the full note rate.
Have a seller credit on the table in New Jersey? Send us the numbers and we'll show you the options.
Illustrative scenario only. Not a rate quote or a commitment to lend. Sam Alpert, NMLS #1961555. Spring Home Company, NMLS #2741914.