Closing Cost Credit vs. Price Reduction: What Is the Difference?

Paying for a down payment and closing costs are often major obstacles that hopeful homeowners have to overcome on their path to purchasing a new house. Fortunately, closing cost credits and price reductions can help lower the amount of money due at closing, making it easier to open the door to your new home, even if your bank account isn’t quite up to snuff when it comes time to close on your home. 

Take a look at the differences between closing cost credits and price reductions before you sign on the dotted line. 

The Pros and Cons of Closing Cost Credits ​

Photo: FG Trade / iStock / Getty Images Plus / Getty Images

The seller issues closing cost credits at closing. The sellers will use a portion of the proceeds of the sale—often limited to under six percent of the purchase price—to cover some of the buyer’s common closing costs, such as broker points and title insurance. The credit is negotiable and both parties must approve the amount before it’s credited to the buyer at closing.

Pros of Closing Cost Credits 

• Keep more of your money in the bank: When the seller foots a portion of the bill for your closing costs, you save money. This benefit is especially beneficial if you’re buying a home that needs repairs or if you want to make sure your emergency fund stays afloat. 

• Buy a home sooner: Borrowers can expect closing costs to cost around five percent of the purchase price of their home. If you live in an area with a higher cost of living, that could mean waiting for a long time before you’re able to save enough money to cover those fees. 

• Avoid taking on more debt: A closing cost credit doesn’t roll any of the cost of the closing into the loan. Unlike some other programs, you don’t have to roll those extra costs into the loan to pay along with your mortgage. 

Cons of Closing Cost Credits

• You don’t have cash in hand: If you receive closing cost credits, you’ll only save money, so you won’t walk away from the closing table with any more cash then you had before. You’ll only be able to use a credit to cover the actual fees or the maximum amount of the limit, whichever comes first. 

• The seller might not agree to it: Not every seller is keen on offering a closing cost credit because that money reduces their profit. You may find that sellers are more interested in accepting an offer from a borrower who isn’t asking them to take a hit on the sale.

• The seller could increase the purchase price: To recoup their closing cost credit losses, a seller may decide to increase the purchase price by the amount they’re offering. For example, if you want a $5,000 closing cost credit on a house listed for $200,000, the seller may counter and say they’ll give you the credit you’re asking for but only if you’ll buy the house for $205,000.

The Pros and Cons of Price Reductions ​

Photo: nazar_ab / E+ / Getty Images

Similar to a closing cost credit, a price reduction can help you save money on a new home. Instead of the seller crediting you money to cover the cost of your closing fees, a price reduction will lower the overall cost of your purchase and home loan. 

When you consider that some of your fees are based on your home’s price tag—like title insurance, which normally costs around one percent of the whole purchase price—that savings adds up.

Pros of Price Reductions

• Lower your overall costs: With many real estate fees tied to the purchase price of your home, a lower sale price can often cut your closing costs by thousands and lower the amount of money you pay in interest over the life of your loan.

• Start with more equity in your home: If your seller is willing to lower their purchase price below the appraised value of the property, you’ve increased the amount of equity you have in your home right out of the gate.

Cons of Price Reductions 

• You don’t get as much bang for your buck: Buying a home at a lower price has many benefits, but you often don’t start to see the savings results until years later. 

• The seller might not agree to it: When it’s a seller’s market in real estate, you may struggle to find a seller willing to accept less for their home than the original asking price. 

Closing Cost Credit vs. Price Reduction

Photo: Maskot / Maskot / Getty Images

While both options can help you save money during the home-buying process, you want to ensure you pick the option that will work best for your personal finances, both now and in the future.

Best for the Buyer

The benefits of closing cost credits and price reductions are pretty similar for the buyer. Both options allow you to pay less for your future home, plus they can help you continue to save every month when you pay your mortgage. However, only one method gets you that upfront savings, which is a closing cost credit.

Best for the buyer: Closing Cost Credit

Best for the Seller

One major drawback of selling your home is that you have to cover the realtor costs for both parties, which is around sixe percent of the purchase price, with three percent going to each of the realtors involved. That’s why some sellers may be reluctant to take on the added expenses of covering a portion of the buyer's closing costs. On the other hand, a price reduction can lower all of those costs for the seller, making cutting those realtors a check a little less painful. 

Best for the Seller: Price Reduction

Paying for Repairs

Sometimes borrowers may ask for a closing cost credit or a price reduction because they need to make repairs after moving in. Maybe the home inspection uncovered a leak in the roof or the appraiser uncovered some termite damage—and the buyer decided that the home is no longer worth the offer price. You can request a closing cost credit or price reduction to meet those needs. 

Keep in mind that the closing cost credit is capped at a certain percentage, so if there’s a major issue you’ll want to ensure you’re able to cover the complete cost. A price reduction may be the best option for confronting significant home issues. Your local mortgage lender can help you figure out which one works best in your situation.

Best for Covering Repairs: Tie (As long as the closing cost credit cap hasn’t been met.)