Seller concessions vs. seller credits: What’s the difference?

In real estate transactions, the terms “seller concessions” and “seller credits” are often used interchangeably. While both can make buying a home more affordable, there are subtle and important differences between the two.

Seller credits almost always refer to a specific dollar amount the seller offers at closing to offset the buyer’s costs. Seller credits are one form of seller concessions, which can take several forms and include a range of expenses during negotiations.

Seller concessions, including seller credits, are designed to lessen the up-front financial burden on you, the buyer, while giving the seller a valuable tool to attract interest in their property. When used properly, seller concessions and credits create a win-win, benefiting both the buyer and the seller in a real estate deal.

What are seller concessions and seller credits?

Seller concessions are incentives sellers offer buyers to cover the expenses involved in buying their home. Seller concessions can include covering various fees, taxes, or services. Seller credits are a bit more specific. For instance, you will often see them advertised as a set amount – $5,000, for example – toward a buyer’s closing costs.

They’re designed to make a home more attractive and affordable to buyers, especially in slow or buyer’s markets. They tend to be seen less in seller’s markets since, theoretically, sellers already have the upper hand and don’t need to incentivize buyers to make an offer. Done properly in the right market conditions, seller concessions and credits benefit both buyers and sellers.

How do seller concessions and credits work?

In the simplest terms, seller concessions and credits work by shifting the responsibility of certain expenses from the buyer to the seller. For instance, rather than the buyer paying every closing cost out of pocket, a seller can agree to pay for some, or give the buyer a credit toward them.

This is often a deal-making concession since closing costs can be significant. They are the costs that must be paid out of pocket – or included in the loan – and include things like loan origination fees, appraisal costs, title search fees, taxes, and insurance premiums. These can add up to between 2% and 5% of the purchase price and can create a financial barrier for some buyers

Examples of seller concessions

Here are examples of the most common seller concessions you’ll see and their approximate costs. Most are in the form of seller-paid closing costs:

• Appraisal fees: A home appraisal confirms a property’s value. This assures a lender that their loan has ample collateral and the buyer that the price they’re paying is warranted. A typical home appraisal costs between $300 and $500.
• Title search fees: A title search ensures that there are no legal claims against the property in question. The cost of a title search can vary by state and the complexity of the search, but typically costs between $75 and $275.
• Loan origination fees: This is a fee that lenders charge to process and underwrite your loan application. Typically, this fee is 0.5% to 1% of the loan amount – for example, $2,000 to $4,000 on $400,000 mortgage.
• Home inspection fees: A home inspection checks the structure and systems of a home. It details the condition of everything from the foundation to the electrical, plumbing and appliances. A home inspection typically costs between $300 and $500.
• Real estate taxes: Property taxes vary by state and county and depend on the value of the property and other factors. Sometimes sellers agree to pay a portion of these.

Example of seller credits

There is more than one way to offer seller credits, but here’s a typical scenario. A seller has set a sales price of $500,000 for his home, but it’s garnering little interest due to a slow market. Rather than lower the price, potentially signaling a problem, they offer a $10,000 seller credit.

Now, let’s assume that the closing costs for a buyer are 3%, or $15,000. Those drop to $5,000. Furthermore, the credits represent an out-of-pocket savings of $10,000. This makes the home much more attractive, and affordable.

Why would sellers offer credits to home buyers?

There are a few common reasons sellers offer credits to buyers. One is the situation in our example: a home has received few or no offers in weeks or months. Credits are a way to lower the price without looking desperate. Another common reason for seller credits is a highly competitive market for the seller; in other words, there are a lot of properties for sale. Rather than lowering the price, credits offer a cash incentive to choose one property over another. In a buyer’s market, seller credits can gain a little leverage back.

On the flip side, seller credits can benefit buyers by making a property more affordable and benefit sellers by encouraging offers and expediting the sale of their home.

Tips for negotiating seller concessions and seller credits

Here are a few ways you, as a buyer, can negotiate and take advantage of seller concessions and credits.

Pay attention to market conditions

Certain market conditions create an environment where sellers are more inclined to make concessions and give credits. For instance, in a buyer’s market, when inventory is high and buyers have ample choice, sellers have more incentive to offer concessions to attract buyers.

Work with your agent

An experienced real estate agent is often worth their weight in closing costs. They will know the local market, other agents, and which sellers are extremely motivated and which properties offer opportunities for healthy negotiations. They’ll also know how to best take advantage of seller concessions and credits.

Maximize the percentage of allowable concessions

It’s not completely up to the seller how much they can offer toward closing costs in the form of credits. Lenders limit these and these are good to know. The limits also vary by loan type as follows:

• FHA loan: Up to 6% of the lower of the sales price or the appraised value
• VA loan: Up to 4% of the purchase price
• USDA loan: Up to 6% of the sales price
• Conventional loan: Varies based on down payment, typically between 3%–9%

FAQ

Are seller concessions a good idea?

Generally, yes. Seller concessions can help make a home more affordable for the buyer while creating more interest and offers for the seller in a slower market.

Can a seller pay all the buyer’s closing costs?

Not always. Different loan types set limits on the amount of credits a seller can offer to offset closing costs. These vary, but generally range between 4% and 6% of the purchase price on government-backed loans and up to 9% on conventional loans.

Do seller concessions reduce the home’s sale price?

Not directly. Typically, the sale price stays the same but the home becomes more affordable since the buyer will pay less out of pocket.

Are seller concessions taxed?

No, buyers typically do not pay taxes on seller concessions. They’re treated as contract adjustments and costs. However, it’s best to consult a tax professional for your specific scenario and any tax implications.

Can seller credits be used to cover repairs?

Yes. Credits can often be used for repairs to keep the sale on track.

The bottom line: Seller concessions and credits have the same purpose

While there is, technically, a difference between seller concessions and credits, the important point is that they have the same purpose: to reduce the financial burden on the buyer of a home. They lower the out-of-pocket costs for the buyer and make a home more affordable. At the same time, they make a seller’s property more attractive and competitive, especially in slow markets. In these ways, they are that rare thing in negotiations: a win-win.

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