How should I use a seller or builder credit?
Spend a seller or builder credit in order of certainty: first cover fixed closing costs (guaranteed dollar-for-dollar value), then prepaids and escrow setup (freeing your own cash), and only put what remains toward a rate buydown — because a permanent buydown only pays off if you keep the loan past its break-even, and a credit spent on costs is banked the day you close. Credits cannot fund the down payment, but by absorbing costs they free your cash to become down payment. Watch the caps: conventional loans limit interested-party contributions to 3%, 6%, or 9% of the price depending on your down payment (2% on investment properties); FHA allows 6%; VA has its own rules — and credit above the cap never reaches you: underwriting treats the excess as a sales concession that reduces the price for loan purposes, so size the contract to the cap deliberately.
Last reviewed 2026-08-24
| Key number | Value | Source |
|---|---|---|
| Conventional interested-party contribution caps (primary/second home) | 3% (less than 10% down) / 6% (10% to under 25% down) / 9% (25% or more down); 2% on investment properties at any down payment | Fannie Mae Selling Guide B3-4.1-02 |
Why order-of-spend matters
The credit is a fixed pot; its uses differ in certainty. Closing costs and prepaids are certain value — every credit dollar that covers them is a dollar of your cash preserved, unconditionally. A permanent rate buydown is a bet: it pays off only if you hold the exact loan past break-even, and refinancing or selling early forfeits the remainder. Ordering the spend from certain to conditional means the conditional bet only gets funded with dollars that had nowhere better to go. The buydown break-even math
Step one and two: costs, then prepaids
First target the fixed charges: lender fees, title and settlement charges, recording costs. Then the prepaids — the escrow account’s initial funding for taxes and insurance, and prepaid interest. Prepaids are your own money being positioned rather than a cost, but covering them with the seller’s credit instead of your cash lightens the closing table all the same. Together these two buckets routinely absorb a meaningful credit before any buydown question even arises.
Temporary buydowns: the softer-landing option
A 2-1 buydown funds a payment two points below the note rate in year one and one point below in year two, from an escrowed subsidy typically paid by the seller or builder; a 1-0 version does one year. It suits a borrower expecting income growth or a likely refinance window — and unlike a permanent buydown, if you refinance mid-buydown the unused subsidy is generally credited back at payoff rather than lost. The trap is qualifying: you must qualify at the full note rate, and the year-three payment is the real payment. Budget for it, not for year one.
Permanent buydowns: last dollars, honest math
Buying the note rate down for the life of the loan is the highest-commitment use of the credit — its value accrues slowly and only fully pays off past break-even. It earns its place for genuinely long-hold borrowers after the certain buckets are full. One more wrinkle worth asking about: pricing ladders are not linear, so the first fraction of a point down sometimes costs far less than the next — have your lender show the actual steps rather than quoting one package.
The caps, and the builder-credit caveat
Interested-party contributions are capped by loan-to-value on conventional primary and second homes: 3% of price with less than 10% down, 6% from 10% up to (but not including) 25% down, and 9% at 25% down or more; investment properties are capped at 2% regardless of down payment; FHA allows 6%; VA concessions have their own 4% cap structure. Credit negotiated above your cap is not handed to you at closing — underwriting treats the excess as a sales concession and reduces the effective sales price for loan purposes, which shrinks the loan the deal supports. So match the contract to the cap before signing. And when a builder ties a large credit to using their affiliated lender, price the whole package against outside quotes: a credit clawed back through a padded rate is not a gift.
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