A seller agrees to give you $10,000.
Would you rather receive:
$10,000 off the purchase price
or
$10,000 toward your closing costs?
For many financed buyers, the seller credit can provide more immediate value because it may reduce the amount of cash needed at closing.
A lower purchase price usually provides a smaller benefit spread over time.
But neither is always better.
The right choice depends on what problem the buyer is trying to solve.
What Is a Seller Credit?
A seller credit, sometimes called a seller concession, is an amount the seller agrees to contribute toward certain buyer costs.
Depending on the loan and lender requirements, it may be used toward allowable expenses such as:
- Loan closing costs
- Escrow and title costs
- Prepaid expenses
- Certain lender fees
- Discount points or an allowable rate buydown
A seller credit is generally handled through escrow.
It is not normally money the buyer receives as unrestricted cash after closing.
The maximum credit and what it can be used for depend on the loan and transaction. Buyers should confirm the available amount with their lender before negotiating it.
What Does a $10,000 Price Reduction Actually Do?
Suppose a buyer is purchasing a home for:
$1,000,000
and negotiates a:
$10,000 price reduction
The new price becomes:
$990,000
If the buyer is putting 20% down, the original $800,000 loan would generally become approximately:
$792,000
The buyer's down payment would also be about $2,000 lower.
So the $10,000 price reduction is real savings, but only part of it reduces the buyer's immediate cash requirement. The rest of the benefit comes through a smaller mortgage and lower payments over time.
What Does a $10,000 Seller Credit Do?
Now imagine the purchase price stays at:
$1,000,000
but the seller provides an allowable:
$10,000 credit
Suppose the buyer has $20,000 or more of eligible closing costs.
If the loan permits the credit and the buyer can use the full amount, the seller may effectively pay $10,000 of those costs.
That could leave the buyer with approximately $10,000 more of their own cash after closing than if they had paid those expenses themselves.
That can be especially valuable after buying a home.
The buyer may want cash available for:
- Moving
- Furniture
- Repairs
- Emergency reserves
- Improvements
- Unexpected expenses
This is why a $10,000 seller credit and a $10,000 price reduction can feel very different financially even though the seller may be giving up a similar amount.
Start With: What Problem Are You Trying to Solve?
This is the easiest way to compare the two options.
If You Want to Reduce Cash Needed at Closing
A seller credit may be more useful.
If the buyer has enough eligible closing costs, the credit can potentially reduce the amount they need to bring into escrow much more than the same reduction in purchase price.
If You Want the Lowest Possible Purchase Price
A price reduction may make more sense.
This may be especially appealing to a buyer who already has plenty of cash and is more concerned with the long-term cost of the property.
If the Appraisal Is a Problem
Price can become more important.
If a home is under contract for $1 million but appraises for less, simply increasing a seller credit may not solve the financing issue.
The buyer and seller may need to address the purchase price, additional buyer cash or another financing solution.
For more on that situation, see What Happens If the Appraisal Comes in Low in California?.
If the Buyer Is Paying Cash
A seller credit may provide much less benefit.
When we have purchased properties ourselves with cash, we generally focus on negotiating the purchase price rather than asking for credits.
There is no mortgage to adjust and typically less reason to structure the negotiation around lender-related closing costs.
For a cash buyer, the lower price may simply be cleaner and more useful.
Know Your Closing Costs Before Asking for a Credit
One mistake we see buyers make is assuming:
More credit is always better.
It isn't.
Suppose a buyer negotiates a:
$15,000 seller credit
but only has:
$9,000 of eligible costs
If the lender and loan only allow the buyer to use $9,000, the remaining amount may provide no benefit.
The buyer generally cannot simply take the unused portion as cash.
That is why we prefer to know the buyer's estimated closing costs before asking the seller for a specific credit.
If there is more negotiating room available than the buyer can reasonably use as a credit, it may make more sense to negotiate part of the benefit as a lower purchase price.
Also, a negotiated seller credit does not automatically turn into a price reduction later. Changing the terms generally requires further agreement between the buyer and seller.
What About Discount Points or Rate Buydowns?
Depending on the loan, a seller credit may also be available for discount points or certain interest-rate buydown structures.
That does not mean this is always the best use of the money.
In the transactions we see, we generally look first at whether the buyer can use the credit for actual closing costs.
That creates a simple and immediate benefit.
A rate buydown or discount points may make sense in some situations, but buyers should have their lender compare the alternatives.
The useful comparison is:
How much cash does this save me today?
How much does it change my monthly payment?
How long would I need to keep the loan before the upfront cost pays for itself?
The answers can be different for every buyer.
Sometimes Neither a Credit Nor a Price Reduction Is Best
We had one transaction where the seller was willing to provide approximately $14,000 toward a new roof.
The buyer could have taken financial help and dealt with the project after closing.
They did not want to.
A roof replacement takes time, contractor coordination and disruption. The buyer wanted to move into the house with the roof already completed rather than take on a major project immediately after buying.
So the better solution for that buyer was having the roof completed, not receiving a credit.
This is a good example of why negotiations should begin with the buyer's actual goal.
Sometimes the buyer needs cash.
Sometimes the buyer wants a lower price.
Sometimes the buyer simply wants the problem fixed.
For more on that decision, see Should You Ask the Seller to Make Repairs After a Home Inspection?.
A Seller Credit Can Be Especially Helpful After Buying
Buying a home can use a significant amount of cash.
Even buyers with strong income may prefer not to empty their accounts at closing.
Preserving cash can provide room for repairs, maintenance and unexpected expenses after the buyer takes ownership.
This is why we look at more than the mortgage payment when helping buyers compare properties and offer terms.
A home has ongoing costs that continue after escrow closes.
For a broader look at those expenses, see The True Cost of Owning a Home in Orange County.
How Should Buyers Compare Their Options?
Before deciding between a seller credit and a lower price, ask:
- How much cash will I need to close?
- How much seller credit can my loan actually use?
- What expenses are eligible?
- How much would the lower price change my loan and payment?
- Do I need to preserve cash after closing?
- Is there an appraisal issue?
- Am I planning to own the property for a long time?
- Is there a repair that I would rather have completed before closing?
Then have the lender calculate the actual alternatives.
The answer may be very different for a buyer putting 5% down than for someone putting 30% down or paying cash.
Lower Price or Seller Credit?
For many financed buyers with significant closing costs:
A seller credit can provide more immediate benefit.
For buyers who already have plenty of cash, cannot use a large credit, are paying cash or simply want the lowest possible purchase price:
A price reduction may make more sense.
Neither approach should be chosen automatically.
At Legacy Real Estate, we try to start with a simple question:
What are we trying to accomplish for this buyer?
Once that is clear, it becomes much easier to decide whether the negotiation should focus on price, credits, repairs or some combination of them.
For a broader overview of buying locally, see Buying a Home in Orange County: What Buyers Should Know.
For additional Orange County housing data and real estate analysis, visit Legacy Real Estate Insights.
Legacy Real Estate does not provide legal, tax, financial or lending advice.