How much can the seller credit the buyer towards closing costs? It is a simple question and it will get you a complicated answer. The maximum allowable contribution from the seller (and/or Realtor) depends on the down payment and occupancy. The rules I am quoting are Federal rules for a Fannie Mae conventional loan.
For an owner occupied or second home there are 3 answers:
1. With less than 10% down the max contribution is 3% of the lesser of the sales price or appraised value.
2. If you put more than 10% down and less than 25% down the max contribution is 6% of the lesser of the sales price or appraised value.
3. If you put down more than 25% down the max contribution is 9% of the lesser of the sales price or appraised value.
For a non-owner occupied home the max contribution is 2% no matter how much you put down.
Remember that when getting a seller credit, the house needs to appraise at the price you agree to pay for the house or you will have an issue. For example, if you want to buy a house for $200,000 and you expect to have closing costs of $6,000 and you decide to offer $206,000 with a seller credit of $6,000, the house needs to appraise at $206,000 to make that deal work.
Rarely will you need more than 3% and even if you could spend it, going over 9% will be almost impossible to make work as the appraiser needs to know about the credit and make comments that it is a normal practice for the time and area. I only work in California but in 25 years, it has never been normal.
FHA & USDA which are always owner occupied will allow 6% even with the minimum down payment and VA will allow up to 4% of the sales price or appraised value whichever is less.
NOTE TO REALTORS: We lenders spent years training you to say that the credit was going towards Non Recurring Closing Costs and I have been spending the last few years untraining you on that one. Most loan programs will allow seller contributions to go towards any legitimate closing costs including prepaid items or recurring costs. There is no loan program that will allow a buyer to use the credit for anything other than legitimate closing costs and under no circumstances is the buyer allowed to get cash back.