When you buy a house, a credit is money applied at closing that reduces the cash you need to bring to the settlement table. Credits come from two places: the seller, who agrees to cover part of your closing costs out of the sale proceeds, and the lender, who covers costs in exchange for giving you a higher interest rate. Neither type reduces your purchase price or your loan balance. Both are capped, and the caps depend on your loan type and, for conventional loans, your down payment.
What Credits Actually Pay For
Credits offset closing costs, not the price of the house. Closing costs generally run 2 to 5 percent of the purchase price and cover the fees required to finalize the loan and transfer title: origination charges, title insurance, the appraisal, recording fees, and prepaid items like property taxes, homeowners insurance, and mortgage interest that fund your escrow account.1Fannie Mae. Closing Costs Calculator On a $350,000 home, that pool of fees can run from $7,000 to $17,500 on top of your down payment.
A credit can be applied to any of those line items, including the prepaid escrow amounts that surprise a lot of first-time buyers. What a credit cannot do is put money in your pocket. If your negotiated credit ends up larger than your actual costs, the extra is either forfeited or applied against your loan balance. You do not receive a refund.
Seller Credits
A seller credit, sometimes called a seller concession, is written into the purchase contract. The seller agrees to direct a portion of the sale proceeds toward your closing costs. If you buy at $400,000 with a $10,000 seller credit, the seller nets $390,000 before their own costs and $10,000 flows to your settlement charges.
The credit is usually negotiated at one of two moments: when you first submit your offer, or after the home inspection turns up something the seller would rather pay you to accept than fix themselves. It can be written as a flat dollar amount or a percentage of the purchase price. Either way, it goes to the lender for approval along with the rest of the contract.
Sellers agree to credits because they widen the pool of buyers who can afford to close, which matters more in a market with high inventory and less in one where offers are stacked. Your leverage tracks that dynamic.
Credits from the seller have real limits on what they can cover. Fannie Mae prohibits using seller contributions to fund your down payment, meet a minimum borrower contribution, or build up reserves.2Fannie Mae. Interested Party Contributions (IPCs) They pay closing costs and prepaid items. That’s it.
Lender Credits and the Rate Tradeoff
A lender credit is a different animal. The lender pays part of your closing costs, and in exchange you accept a higher interest rate for the life of the loan. You save cash today and pay more each month for as long as you keep the mortgage.
Lenders price credits in points, where one point equals one percent of the loan amount.3Consumer Financial Protection Bureau. How Should I Use Lender Credits and Points (Also Called Discount Points)? On a $300,000 loan, one point is $3,000. Accept a rate above the lender’s base and the lender offers a credit of one or more points toward your closing costs, recovering that money through the extra interest you pay over the years.
The decision turns on how long you plan to hold the loan. Divide the total lender credit by the additional monthly payment the higher rate creates. That’s your break-even, in months. Sell or refinance before it and the credit saved you money. Stay past it and you would have been better off paying the costs upfront and keeping the lower rate.
Ask each lender for two quotes, one with credits and one without, and run the break-even against the shortest, likeliest, and longest periods you might keep the mortgage.4Consumer Financial Protection Bureau. Select the Kind of Loan That Fits Your Needs
How Much Credit You Can Receive: Caps by Loan Type
Every major loan program limits how much the seller and other interested parties can contribute toward your closing. Ask for more than the cap and the extra is treated as a price reduction, which can throw off the appraisal and derail the loan. Match your request to the right ceiling.
Conventional Loans
Fannie Mae ties its seller-contribution cap to your loan-to-value ratio. The bigger your down payment, the more the seller can chip in:2Fannie Mae. Interested Party Contributions (IPCs)
- LTV above 90% (down payment under 10%): capped at 3% of the purchase price or appraised value, whichever is lower
- LTV of 75.01% to 90% (down payment of 10% to 24.99%): capped at 6%
- LTV of 75% or less (down payment of 25% or more): capped at 9%
- Investment properties: capped at 2%, regardless of LTV
The cap is a combined ceiling across every interested party: seller, agent, builder, or anyone else with a financial stake in the sale.
FHA Loans
FHA allows interested parties to contribute up to 6 percent of the sales price toward closing costs, prepaid items, and discount points.5U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower The cap doesn’t change with down payment size, which matters because FHA buyers can put down as little as 3.5 percent.
VA Loans
For veterans and service members, the seller can contribute up to 4 percent of the home’s reasonable value. VA concessions are defined broadly and can include credits toward the VA funding fee, debt payoff, and prepayment of hazard insurance.6Veterans Affairs. VA Funding Fee and Loan Closing Costs
USDA Loans
The USDA Single-Family Housing Guaranteed Loan Program caps seller concessions at 6 percent of the sales price. A 2024 exemption removed real estate commission fees from that count, so the 6 percent applies only to concessions directed at the buyer’s financing and closing costs.7USDA Rural Housing Service. 2026 USDA Explanatory Notes – Rural Housing Service
Where Credits Show Up on Your Paperwork
Your lender must deliver the Closing Disclosure at least three business days before settlement.8eCFR. 12 CFR 1026.19 – Certain Mortgage and Variable-Rate Transactions That’s your last clean chance to verify every credit. Seller credits appear in the Summaries of Transactions section. Lender credits appear as a negative number in Section J on page 2. Both reduce the “Cash to Close” figure directly.
Put the Closing Disclosure side by side with the Loan Estimate you received when you applied. Every negotiated credit should carry through. If a number moved or a credit disappeared, call your loan officer before the three days run out.9Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs Also compare the credit lines against your Loan Estimate’s Section J, where lender credits are first quoted.10Consumer Financial Protection Bureau. Compare and Negotiate Your Loan Offers
Taxes: What Seller Credits Do to Your Return
A seller credit is not taxable income to you. It can still affect your taxes in two ways.
If the seller pays discount points on your behalf, you may be able to deduct those points as mortgage interest for the year you buy the home. You then reduce your home’s cost basis by the amount of those seller-paid points.11Internal Revenue Service. Publication 551 – Basis of Assets
If the seller covers your share of property taxes for the period starting on the sale date, you can still deduct those taxes, but you reduce your cost basis by that amount unless you reimbursed the seller at settlement.12Internal Revenue Service. Tax Information for Homeowners A lower basis means a larger taxable gain whenever you sell, though the home-sale exclusion of $250,000 for single filers and $500,000 for married couples filing jointly shields most homeowners from ever paying that.