A buyer credit at closing is a dollar amount, contributed by the seller, your lender, or sometimes your real estate agent, that reduces the cash you have to bring to the closing table by paying for specific transaction fees. It offsets costs like the appraisal, title insurance, escrow deposits, and loan origination charges. It cannot be applied to your down payment, and every major loan program limits how much outside help you can accept.
Where the Credit Comes From
Most buyer credits are seller concessions. The seller agrees to pay part of your closing costs out of their sale proceeds, usually as part of the initial offer negotiation or after a home inspection turns up needed repairs. Rather than fix the problems themselves, some sellers offer a credit so you can handle the work on your own schedule.
A lender credit is different. Your mortgage lender pays some of your closing costs in exchange for a higher interest rate on the loan, so you pay less upfront and more each month over the life of the mortgage.1Consumer Financial Protection Bureau. How Should I Use Lender Credits and Points (Also Called Discount Points)? It’s the reverse of paying discount points to buy the rate down.
The two sources can be combined. Lender credits from premium pricing are excluded from the interested party contribution limits that cap seller concessions on conventional loans, so a lender credit stacked on top of the maximum allowed seller concession does not trigger a violation.2Fannie Mae. B3-4.1-02, Interested Party Contributions (IPCs)
What the Credit Can Pay For
Credits apply to the fees that accumulate during a real estate closing, which generally fall into three categories.
- Loan-related charges: the origination fee, discount points, and the credit report fee.
- Third-party service fees: the appraisal, title search, title insurance premiums, government recording fees for the deed, flood zone certification, and attorney or settlement agent fees where required.
- Prepaids and escrow deposits: per-diem interest between your closing date and the start of your first full payment cycle, plus the initial escrow deposits your lender collects for future property tax and homeowners insurance payments.3Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions
A prorated property tax credit from the seller works the same way. If the seller occupied the home for part of the current tax period, they owe you a proportional reimbursement for that time. When your lender sets up an escrow account, that prorated credit can offset some or all of the initial escrow deposit you would otherwise owe at closing.4Fannie Mae. Selling Guide Announcement (SEL-2025-03)
What the Credit Cannot Pay For
Under every major loan program, a buyer credit cannot go toward your minimum required down payment. That has to come from your own savings or another approved source such as gift funds. The rule exists so you have genuine financial investment in the property, separate from anything negotiated into the deal.
You also cannot pocket the difference if the credit exceeds your actual closing costs. Under Fannie Mae guidelines, any financing concession that comes in above your total closing costs gets reclassified as a sales concession, which is deducted from the property’s sales price, and the lender then recalculates the loan-to-value ratio using the reduced price.2Fannie Mae. B3-4.1-02, Interested Party Contributions (IPCs) Estimate your closing costs carefully before you negotiate a specific credit amount. Asking for more than you need doesn’t put cash in your hand; it just complicates the deal.
How Much You Can Receive by Loan Type
Every major loan program caps how much an interested party (the seller, builder, real estate agent, or another participant) can contribute. The limits keep sales prices and loan-to-value ratios honest.
Conventional Loans
Fannie Mae ties the maximum financing concession to your loan-to-value ratio, calculated against the lower of the sales price or appraised value:
- Down payment under 10% (LTV above 90%): up to 3% of the sales price.
- Down payment of 10% to 25% (LTV of 75.01% to 90%): up to 6%.
- Down payment above 25% (LTV of 75% or less): up to 9%.
- Investment properties: 2% regardless of down payment.
Lender credits from premium pricing sit outside these caps and are calculated separately.2Fannie Mae. B3-4.1-02, Interested Party Contributions (IPCs)
FHA Loans
Loans insured by the Federal Housing Administration allow interested parties to contribute up to 6% of the sales price. That 6% covers origination fees, other closing costs (including items paid outside of closing), prepaids, discount points, temporary or permanent interest rate buydowns, and the upfront mortgage insurance premium.5U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower?
VA Loans
VA loans work in two parts. The seller can pay all of your normal closing costs with no dollar cap. Anything beyond standard closing costs, such as paying the VA funding fee, paying off your existing debts, or prepaying hazard insurance, is treated as a concession and capped at 4% of the home’s reasonable value from the VA Notice of Value.6Veterans Affairs. VA Funding Fee and Loan Closing Costs
USDA Loans
USDA rural housing loans allow seller or other interested party contributions of up to 6% of the sales price, applied to eligible loan purposes.7USDA Rural Development. Loan Purposes and Restrictions
Where to Find the Credit on Your Closing Disclosure
Your lender must give you a Closing Disclosure at least three business days before closing, which lets you check the final numbers against your original Loan Estimate.8Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs Credits show up in a few different places:
- General lender credits appear as a negative number labeled “Lender Credits” in Section J on page 2, under Total Closing Costs.3Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions
- Lender credits tied to a specific fee appear in the “Paid by Others” column on page 2, in the row for that fee.9Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs – Section: Lender Credits
- Seller-paid costs also appear in the “Paid by Others” column on page 2 for each applicable line, and seller credits factor into the borrower’s transaction summary on page 3.8Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs
The “Calculating Cash to Close” table on page 3 ties it all together. It combines total closing costs with the purchase price, then subtracts your earnest money deposit and every applicable credit. The remainder is the exact amount you need to bring to closing by wire transfer or cashier’s check.10Consumer Financial Protection Bureau. What Is a Closing Disclosure?
Tax Treatment
Seller-paid closing costs are generally not taxable income to you as the buyer, but they can affect your home’s cost basis, which is the figure used to calculate gain or loss when you sell. If the seller pays for points on your mortgage, that payment may reduce the seller’s amount realized rather than adding to your income. Certain costs the seller covers that would normally be yours, such as a share of property taxes, may be added to your basis.11Internal Revenue Service. Publication 523 – Selling Your Home Because treatment depends on the type of cost being credited, a tax professional can help you track your basis correctly from the start.