Seller Concessions vs. Lender Credits: What’s the Difference?
Understanding your tools is the first step to reducing your out-of-pocket expenses. Both seller concessions and lender credits can cover your closing costs, but they work in fundamentally different ways. One is a negotiation tactic, while the other is a loan structuring choice.
Understanding Seller Concessions (Credits)
A seller concession is a dollar amount or percentage of the home's purchase price that the seller agrees to contribute toward your closing costs. This is a key negotiating point in your purchase offer. For example, on a $450,000 home in Henderson, Nevada, closing costs might be around 2% to 5%, or $9,000 to $22,500. You could ask the seller to pay up to a certain limit.
Loan programs cap the maximum seller concession allowed:
- Conventional Loans: The cap depends on your down payment. With less than 10% down, the seller can contribute up to 3% of the purchase price. With a down payment between 10% and 24.9%, the limit is 6%. For down payments of 25% or more, the limit is 9%. (The data, information, or policy mentioned here may vary over time.)
- FHA Loans: The seller can contribute up to 6% of the purchase price toward closing costs, prepaid expenses, and discount points. (The data, information, or policy mentioned here may vary over time.)
- VA Loans: The seller can pay for all of the veteran's reasonable and customary closing costs and discount points without a specific percentage limit. In addition to these costs, the seller can also provide up to 4% of the loan amount toward other items like paying off the buyer's debts or judgments. (The data, information, or policy mentioned here may vary over time.)
Understanding Lender Credits
A lender credit is money from your mortgage lender used to pay your closing costs. It is not a gift. In exchange for this credit, you agree to a slightly higher interest rate on your mortgage. Essentially, you are financing your closing costs over the life of the loan through a higher monthly payment.
For instance, to cover $7,000 in closing costs, your lender might offer you an interest rate of 6.75% instead of the 6.375% rate you would have received by paying the costs yourself. This can be a powerful tool for homebuyers with limited cash but can result in paying more in total interest over time. (The data, information, or policy mentioned here may vary over time.)
How Do I Write an Offer That Gets the Seller to Pay My Closing Costs?
Successfully negotiating seller credits, especially in a competitive Nevada market, requires a strategic offer. Simply asking the seller to pay your fees without context can make your offer seem weaker. The best approach is to build the concession into the purchase price.
Here’s how to structure it:
- Determine the Seller's Net Goal: The seller cares most about the final amount they will receive.
- Calculate the Offer Price: If you want to buy a home listed for $500,000 and need $15,000 for closing costs (a 3% concession), you could offer $515,000 for the home and simultaneously ask for a $15,000 seller credit.
- Present a Clean Offer: For the seller, the net result is the same: they still receive their target of $500,000. This structure makes your request much more appealing because it doesn't reduce their profit.
A critical note: The home must appraise for the higher purchase price ($515,000 in our example). If it appraises for less, you may need to renegotiate or cover the difference in cash.
Are There Nevada-Specific Down Payment Assistance Programs That Cover Closing Fees?
Yes. Nevada offers excellent programs designed to help homebuyers overcome the hurdles of both the down payment and closing costs. These programs are not just for first-time buyers and can be a game-changer.
The most prominent program is the Home Is Possible (HIP) program, managed by the Nevada Housing Division. Here’s how it works:
- Assistance Type: HIP provides a grant of up to 5% of the total loan amount.
- How It's Used: This money can be applied to your down payment, your closing costs, or a combination of both.
- Key Feature: The best part is that this assistance is a grant, meaning it does not need to be repaid.
- Eligibility: To qualify, you typically need a minimum credit score of 640, must meet certain income limits based on your county, and the home's purchase price must be below the program's cap. (The data, information, or policy mentioned here may vary over time.)
This program can effectively eliminate most, if not all, of your required cash-to-close.
What Is a 'No-Closing-Cost' Mortgage, and What's the Hidden Catch?
A 'no-closing-cost' mortgage is a marketing term, not a distinct loan product. It is simply a mortgage where the lender provides a large enough lender credit to cover all of your closing fees. You arrive at the signing table with little to no cash required for fees.
The hidden catch is the permanently higher interest rate. As explained with lender credits, you are paying for those upfront costs over the life of the loan. While it's an excellent option if you are short on cash, it is crucial to understand the long-term financial implications. Over 30 years, a seemingly small increase in your interest rate can add up to tens of thousands of dollars in extra interest payments.
Can I Roll Closing Costs into My Loan Amount on a Conventional or FHA Loan?
This is a common point of confusion. For a standard home purchase, you cannot simply add the closing costs on top of your loan amount. For example, if you are borrowing $400,000 for a home and have $12,000 in closing costs, you cannot ask for a loan of $412,000.
The ways to 'finance' your closing costs are through the methods we've already discussed:
- Using Seller Credits: By increasing the purchase price to offset the credit, you are effectively rolling the cost into the loan because your loan amount is based on that higher price.
- Using Lender Credits: You are financing the costs through a higher interest rate, not by increasing the principal loan balance.
Some specific refinance loans, like an FHA Streamline or VA Interest Rate Reduction Refinance Loan (IRRRL), do allow you to roll closing costs into the new loan balance, but this is not an option for purchase loans. (The data, information, or policy mentioned here may vary over time.)
Why Are My Estimated Closing Costs So Much Higher Than I Expected?
Closing costs often surprise buyers because they are a collection of many different fees from multiple parties involved in the transaction. They generally fall into three categories:
- Lender Fees: These are charges for creating the loan. They include the origination fee, underwriting fee, and processing fee.
- Third-Party Fees: These are fees paid to other companies for services required to close the loan. Examples include the appraisal fee, credit report fee, flood certification, and title insurance.
- Prepaids and Escrow Items: These are not technically fees but are funds you must pay upfront. This includes your first year of homeowners insurance, several months of property taxes to establish your escrow account, and per diem interest for the days remaining in the month you close.
In Nevada, title and escrow fees can be a significant portion of the total. Reviewing your Loan Estimate document line by line with your loan officer is the best way to understand every charge.
What Are the Exact Steps to Reduce My Cash-to-Close Before Signing Day?
Here is a clear, actionable checklist to follow:
- Get Multiple Loan Estimates: Contact at least three different lenders. This allows you to compare not just interest rates but the lender fees on Page 2 of the estimate. Some lenders have higher origination fees than others.
- Discuss Lender Credits: Ask your chosen loan officer to show you options with and without lender credits. See what interest rate is required to cover some or all of your costs and decide if the trade-off is worth it.
- Strategize with Your Realtor: Before making an offer, talk to your real estate agent about the current market conditions in Las Vegas or Reno. Decide on an offer strategy that includes seller concessions without weakening your position.
- Apply for Nevada DPA: Check the Nevada Housing Division's website to see if you meet the income and credit requirements for the Home Is Possible grant. This could be your most powerful tool.
- Shop for Services: For services listed in Section C of your Loan Estimate, like title insurance and pest inspection, you have the right to shop for your own provider to potentially find a lower price.
Does Asking for Closing Costs Make My Offer Less Competitive in Summerlin?
In a highly desirable and competitive market like Summerlin, an offer asking for closing costs can be perceived as weaker than a similar offer without that request, but only if it is not structured correctly.
A seller reviewing multiple offers will prioritize the one that provides the highest net profit and has the fewest potential complications. An offer for $490,000 that asks for a $10,000 credit is less appealing than a clean offer for $485,000, even though the net price is the same. The second offer appears simpler.
However, if you use the strategy of increasing the purchase price to cover the credit (e.g., offering $500,000 with a $10,000 credit request on a $490,000 home), your offer remains very competitive. It shows you are financially savvy and are working to meet the seller's net price. A well-advised seller will see that the net proceeds are identical and will evaluate your offer on its other merits, like your financing strength and proposed closing date. Understanding your closing cost options is the first step. To get a detailed breakdown for your specific situation in Nevada and see if you qualify for assistance, a personalized Loan Estimate is the best tool. It clarifies every fee with no obligation.
Ready to see how these strategies can reduce your out-of-pocket costs on a Nevada home? The best way to understand your options is with a personalized breakdown. Apply now to get a detailed loan estimate and discover what assistance you may qualify for, all with no obligation.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
References
CFPB - What are closing costs?
