Your $800,000 listing in Palm Desert has been on the market for 40 days. The seller is ready to give up $20,000, and the first instinct is always the same: drop the price to $780,000. Before you change the MLS, run the seller credit vs price reduction numbers. They usually surprise sellers.
To your seller, the two are almost the same check. To a buyer, they are completely different offers. A price cut lowers the buyer's payment by about $135 a month. A credit lowers the cash the buyer has to bring to closing by $18,000. In most price ranges, far more buyers are short on cash than short on $135 a month.
Bill Lewis at Choice One Mortgage has spent more than 30 years working with listing agents and buyers across the Coachella Valley, Ventura County and the South Bay. In this guide, we'll show the seller's net both ways, the buyer's side both ways, the credit limits for each loan type, the appraisal problem, and a short script you can use at the kitchen table.
Quick answer: On an $800,000 sale, a $20,000 price reduction nets the seller about $1,022 more than a $20,000 credit, because commission and transfer tax are charged on the higher price. For the buyer, the credit reduces cash to close by $18,000 more than the price cut does, while the price cut lowers the monthly payment by about $135. A credit can therefore bring in buyers a price cut will not, for nearly the same net, as long as it fits the limit for the buyer's loan type and the home appraises at the contract price.
What Each Choice Does to Your Seller's Net
Start with the number the seller cares about. The only costs that change between the two choices are the ones charged as a percentage of the price.
| No Concession | $20,000 Price Reduction | $20,000 Seller Credit | |
|---|---|---|---|
| Contract price | $800,000 | $780,000 | $800,000 |
| Credit to buyer | $0 | $0 | $20,000 |
| Brokerage fees (5% example) | $40,000 | $39,000 | $40,000 |
| County transfer tax ($1.10 per $1,000) | $880 | $858 | $880 |
| Net before loan payoff and fixed costs | $759,120 | $740,142 | $739,120 |
Figures are examples only. Commission is negotiable and is shown at 5% of the price for illustration. Transfer tax is the county rate of $1.10 per $1,000; some cities charge their own tax on top. Escrow, title, payoff and prorations are left out because they are the same or nearly the same in both columns. Rates are examples and change daily.
The difference is $1,022: $1,000 of commission and $22 of transfer tax. Put another way, a $20,000 credit costs your seller the same as a $21,077 price reduction.
Say the commission part out loud before the seller works it out. A seller who hears it from you first will trust the rest of the math. For a full net sheet, use the seller net proceeds calculator.
What Each Choice Does for the Buyer
Now the other side of the table. Assume a buyer with 10% down, a 30-year fixed conventional loan at an example rate of 6.5%, and $20,000 of closing costs and prepaid items.
| $20,000 Price Reduction | $20,000 Seller Credit | Difference | |
|---|---|---|---|
| Price | $780,000 | $800,000 | |
| Down payment (10%) | $78,000 | $80,000 | $2,000 |
| Loan amount | $702,000 | $720,000 | $18,000 |
| Closing costs paid by buyer | $20,000 | $0 | $20,000 |
| Monthly P&I at 6.5% | $4,437.12 | $4,550.89 | $113.77 |
| Monthly property tax (1.25%) | $812.50 | $833.33 | $20.83 |
| P&I plus tax | $5,249.62 | $5,384.22 | $134.60 |
| Cash to close | $98,000 | $80,000 | $18,000 |
Mortgage insurance and homeowners insurance are left out; they are close to equal in both columns.
The buyer who takes the credit needs $18,000 less cash and pays $134.60 more a month. It would take more than 11 years of that higher payment to add up to the $18,000. Most buyers sell or refinance well before then.
Why That Matters for Your Listing
Think about who is looking at an $800,000 home. Many are move-up buyers with good income whose savings are tied up in the down payment. A buyer with $85,000 in the bank can close on the credit version and cannot close on the price-reduction version. Your seller reaches that buyer at a cost of $1,022.
The credit can also be spent on the payment instead of on closing costs. On the $720,000 loan, a 2-1 temporary buydown costs $16,386.77. It lowers the buyer's principal and interest to $3,648.13 in year one (a savings of $902.76 a month) and $4,088.08 in year two, with $3,613 left for closing costs. A listing that can advertise that first-year payment gets a different response than one that is $20,000 cheaper. Buydown, points, or lower price walks the buyer through that choice, and our seller concession strategy guide covers it for the buyer's agent.
How Much a Seller Can Credit by Loan Type
A price reduction has no limit. A credit does. Lenders call credits interested party contributions, and each loan program caps them. Ask the buyer's agent which loan the buyer is using before you counter.
| Buyer's Loan | Maximum Seller Credit | On an $800,000 Sale |
|---|---|---|
| Conventional, primary or second home, less than 10% down | 3% | $24,000 |
| Conventional, primary or second home, 10% up to 25% down | 6% | $48,000 |
| Conventional, primary or second home, 25% or more down | 9% | $72,000 |
| Conventional, investment property | 2% | $16,000 |
| FHA | 6% of the sales price | $48,000 |
| VA | 4% of the appraised value in concessions, plus the buyer's normal closing costs | $32,000 plus closing costs |
The conventional limits come from Fannie Mae's rules on interested party contributions, and Freddie Mac uses the same percentages. They are figured on the sales price or the appraised value, whichever is lower. The FHA limit is in HUD Handbook 4000.1. On a VA loan, the 4% covers items such as the funding fee, prepaid taxes and insurance, and buydowns; the buyer's ordinary closing costs can be paid on top of it. Jumbo loans follow each lender's own limits, so ask.
Three rules apply to every program:
- The credit cannot exceed the buyer's actual costs. Closing costs, prepaid taxes and insurance, discount points and a temporary buydown count. If those total $14,000, a $20,000 credit leaves $6,000 unused.
- It cannot be used for the down payment or paid to the buyer in cash.
- Anything over the limit is treated as a price reduction. The lender subtracts the excess from the price before figuring the loan, so the buyer's loan shrinks and the seller has given money away for nothing.
The Appraisal Issue
This is the honest weakness of a credit. The contract price stays at $800,000, so the home has to appraise at $800,000. A price reduction to $780,000 only has to appraise at $780,000.
If your comparable sales support $800,000, the credit is safe. If the reason you are conceding is that the comps say $780,000, a credit only postpones the problem by three weeks. The appraisal comes in low, the buyer's loan is cut to match, and you are renegotiating in the middle of escrow with a seller who thought the deal was done.
Appraisers also see the credit. It is written in the contract, and they are required to consider concessions when they look at the sale. A credit of 2% to 3% that pays real closing costs rarely draws attention. A credit stacked on top of a price that is already a stretch does.
When a Price Reduction Is the Better Call
- The home is priced above the comps. Fix the price. A credit does not fix value.
- The listing has gone stale and needs new eyes. A lower price moves the home into new search brackets and triggers alerts to saved searches. A credit in the agent remarks does neither.
- The likely buyer has cash. In Indian Wells, Manhattan Beach or a 55+ community where many buyers pay cash or put 40% down, a credit solves a problem the buyer does not have.
- The buyer is an investor. The 2% cap leaves little room.
- The price sits just above a search break or a loan limit. Getting under the conforming loan limit can lower the buyer's rate and widen the loan choices.
How to Present It to a Seller: Step by Step
- Check the comps first. If $800,000 will not appraise, stop here and talk about price.
- Find out the buyer's loan type and down payment. That sets the credit limit from the table above.
- Ask the buyer's lender for the buyer's actual closing costs and prepaids, so the credit is not larger than what can be used.
- Run both net sheets. Show the seller the two bottom lines next to each other.
- Show the buyer's side. Cash to close and payment for each version. The seller credit vs. price reduction calculator produces both columns.
- Write the counter with a specific dollar credit and the words the buyer's lender needs: toward the buyer's closing costs, prepaid items and interest rate buydown.
- Review after the appraisal and again before closing. If the buyer's costs come in under the credit, agree on what happens to the difference.
A Script for the Kitchen Table
"You told me you can live with $20,000 less. There are two ways to give it. If we cut the price to $780,000, you net about $740,100 before your payoff. If we stay at $800,000 and offer a $20,000 credit, you net about $739,100. That is roughly $1,000 less to you, and part of that $1,000 is commission, including mine.
Here is what the $1,000 buys. With the price cut, a buyer putting 10% down has to bring $98,000 to closing. With the credit, the same buyer brings $80,000. Every buyer who has between $80,000 and $98,000 saved can buy your home with the credit and cannot with the price cut. I would rather have those buyers competing for your house. The condition is that the home appraises at $800,000, and here are the three sales that say it will."
Mistakes to Watch For
- Offering a credit bigger than the limit. A $30,000 credit to a conventional buyer with 5% down is $6,000 over the 3% cap.
- Offering a credit bigger than the buyer's costs. Unused credit does not go to the buyer. Have the buyer's lender put it into a buydown or discount points instead.
- Vague contract language. A credit described as being for repairs or in lieu of repairs makes underwriters ask for the repairs to be completed. Write it as a credit toward closing costs.
- Agreeing to a credit after a low appraisal. Once the value is $780,000, the limits are figured on $780,000 and the loan is too.
- Not checking the buyer's approval. A credit only helps if the buyer qualifies for the larger loan. Verify the pre-approval letter and ask the lender whether it was written at the full price.
- Changing structure late. Moving from a price cut to a credit in the last week means a contract addendum, a revised loan approval and a new Closing Disclosure. The loan timeline inside the purchase agreement shows how little slack there is.
The Bottom Line
A $20,000 credit and a $20,000 price cut are about $1,000 apart for your seller and $18,000 apart for the buyer. When the comps support the price and the likely buyer is financing with a modest down payment, the credit buys more demand per dollar than anything else your seller can do. When the price itself is the problem, cut the price.
Send us the listing price and the buyer profile you expect, and we'll prepare the buyer-side columns for your seller presentation at no cost. Details on the loans most buyers use are on our purchase loans page.
Preparing a price or credit conversation with a seller?
Call Bill Lewis at (310) 614-5920 and we'll run the buyer's cash to close and payment both ways for your listing.
Get a Free ConsultationFrequently Asked Questions About Seller Credits and Price Reductions
Does a seller net more with a price reduction or a credit?
A price reduction nets slightly more. On an $800,000 sale with a 5% commission and county transfer tax, a $20,000 price cut leaves the seller $1,022 ahead of a $20,000 credit, because those costs are charged on the contract price. The gap grows or shrinks with the commission rate.
Why would a buyer prefer a credit over a lower price?
Because it reduces cash to close almost dollar for dollar. In our example the credit saves the buyer $18,000 at closing, while the price cut saves $2,000 at closing and about $135 a month. A buyer with strong income and limited savings can only use the first one.
What is the maximum seller credit on a conventional loan?
On a primary residence or second home it is 3% of the price with less than 10% down, 6% with 10% up to 25% down, and 9% with 25% or more down. Investment properties are capped at 2%. The percentage applies to the sales price or appraised value, whichever is lower.
What happens if the seller credit is more than the buyer's closing costs?
The extra cannot be handed to the buyer. The buyer's lender can often absorb it by adding discount points or a temporary buydown, which are allowed uses. If not, the credit is reduced to the amount that can be used, and the seller keeps the rest.
Does a seller credit affect the appraisal?
It does not change the value, but it leaves the contract price higher, so the home must appraise at that higher number. The appraiser sees the credit in the contract. If the appraisal comes in below the price, the loan and the credit limit are both figured on the lower value.
Can a seller credit pay for a rate buydown?
Yes. Discount points and temporary buydowns such as a 2-1 are permitted uses on conventional, FHA and VA loans, and the cost counts toward the credit limit. On a VA loan a seller-paid temporary buydown counts toward the 4% concession cap.
Is a seller credit taxed differently from a price reduction?
Both lower what the seller receives from the sale, but how each is reported is a question for the seller's CPA. We do not give tax advice. For the buyer, the credit version records at the higher price, so the starting property tax assessment is higher: about $250 a year on a $20,000 difference at 1.25%.
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About the Author: Bill Lewis
Mortgage Loan Originator, Choice One Mortgage · NMLS #284797
Bill Lewis has spent more than 30 years helping Southern California homebuyers and the Realtors who serve them structure financing that fits their real situation. Based in La Quinta, Choice One Mortgage serves buyers throughout the Coachella Valley, Ventura County, and the South Bay. Learn more about our team or call (310) 614-5920.
This article is general information for real estate professionals, not legal, tax or financial advice. Seller net figures use an example commission of 5% and the county transfer tax rate; commissions are negotiable and some cities charge additional transfer tax. Interest rates, payments, closing costs and buydown costs are examples only and change daily. Seller contribution limits are set by Fannie Mae, Freddie Mac, FHA, VA and individual lenders and can change; confirm the limit and the buyer's allowable costs with the buyer's lender before writing a credit into a contract. This is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines, and property valuation. Equal Housing Opportunity. COMC, Inc. dba Choice One Mortgage Company. Licensed by the CA DRE #01238593. NMLS #233784.