Maximizing Leverage: Navigating the 3% Seller Credit Limit

Rule

Lendency permits seller-paid costs, credits, or interested party contributions (IPCs) up to a maximum of 3% of the property's purchase price. Any amount exceeding this 3% threshold is classified as a "sales concession." This classification triggers a mandatory reduction in the property's cost basis, which is the value used to size your loan.

Lendency Insight

Investors often negotiate large seller credits to cover closing costs or buy down interest rates. However, it is important to understand the trade-off. While a credit over 3% puts more cash in your pocket at closing, it does so by maintaining a higher recorded purchase price. Because most local municipalities base your annual property tax assessments on that recorded price, you may end up paying higher taxes every year you own the property.

By negotiating a lower purchase price instead of an outsized credit, you effectively "lock in" a lower tax basis. In many markets, the compounding savings from lower property taxes over a 5-to-10-year hold can far outweigh the one-time benefit of a closing credit that exceeds the 3% limit.

Common Scenarios & FAQs

  • What counts as an Interested Party Contribution? Any cost normally the responsibility of the purchaser that is paid by someone with a financial interest in the sale, such as the seller, the builder, or the real estate agent.

  • Do realtor commissions count toward the 3%? No. As long as the realtor fee is customary and reasonable for the market, it is not treated as a sales concession.

  • What can I use the 3% credit for? You can apply these funds toward origination fees, discount points, application fees, appraisal and credit report costs, prepaids, escrows, and title insurance.

  • Can the seller pay for my required reserves? No. Credits can be used for closing costs and prepaids, but they cannot be used to satisfy your liquid reserve requirements.

Key Definitions

  • Interested Party Contribution (IPC): A payment or credit provided by a party involved in the transaction (like the seller) to help cover the borrower's closing costs.

  • Sales Concession: The portion of an IPC that exceeds the allowed limit (3%), which the lender views as an artificial inflation of the purchase price.

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