How Do Seller Credits to Buyer Work?

The costs of buying a home quickly add up for buyers. On financed deals, buyers pay loan-acquisition costs and for services used during the escrow process in addition to a down payment. Buyers may ask the seller to credit them a specified amount at closing to help with many of the expenses. The seller concession must be included in the sales contract, and the amount and terms of the credit are negotiable.

Review Closing Costs

The seller and buyer pay their own share of closing costs to settle the transaction, including escrow fees, title insurance and property taxes. The allocation of fees depends on market customs. Lenders typically require buyers to pay only fees which are considered customary and reasonable for a particular market. As such, the seller credit covers fees that fit this description. Lenders cap the amount of fees a seller credit may cover at 3 percent to 9 percent of the loan amount.

Negotiate the Terms 

The buyer and seller typically negotiate the terms of a seller credit early in the transaction. Buyers request an amount, as a percentage or dollar amount, in the offer to purchase. The seller may accept, reject or counter-offer the seller credit. The seller pays the credit as a lump sum at closing from his sale proceeds. Limitations to what the credit covers may apply. For example, the seller may agree only to pay non-recurring closing costs, such as escrow, title, messenger, recording and notary fees and refuse to cover recurring fees such as the buyer's portion of homeowner's association dues, mortgage interest, property taxes and homeowners insurance.

Enjoy Benefits for Both Sides

Seller credits can benefit both sides to the transaction. Sellers may entice buyers by offering a seller credit and buyers can reduce their out-of-pocket costs at closing. Cash-strapped buyers can request a seller credit and increase the sales price to entice a seller to accept. As such, a seller credit allows the buyer to finance his closing costs into the new loan amount. The lender must approve the credit and the home's value must merit the increase in sale price as determined by an appraisal.

Know Limitations Placed by Lenders

Lenders limit what the buyer and a seller credit can pay for. Prohibited items are known as non-allowable fees. For example, lenders for the Department of Veterans Affairs cap the amount a loan broker or lender can make on the loan to 1 percent, known as an origination fee. If the buyer overestimated his closing costs, a credit surplus may occur. In such cases, the buyer may renegotiate the sale price dollar-for-dollar for the unused amount or the seller could end up with more net proceeds at closing for the unused portion. A seller credit cannot be used toward the buyer's down payment.