Can a Seller Contribute to Your Down Payment?

No, a seller cannot contribute to your down payment. Every major loan program, including Fannie Mae, Freddie Mac, FHA, VA, and USDA, prohibits the seller from funding the borrower’s minimum required investment in the property. What a seller can do is pay your closing costs, prepaids, and rate buydown, which frees your own cash to go toward the down payment. There is also one narrow exception involving a family sale.

Why the Down Payment Itself Is Off-Limits

Lenders require you to have personal money at risk in the property. Loans that close with no borrower funds default at higher rates, so the rules draw a hard line between the down payment and everything else. Fannie Mae’s guidelines state that interested party contributions cannot be used toward the borrower’s down payment, financial reserves, or minimum borrower contribution.¹ FHA rules match, prohibiting interested party contributions from satisfying the borrower’s minimum required investment.²

Government-run down payment assistance programs at the federal, state, or local level are allowed because their funding does not come from anyone with a financial interest in the sale. A seller routing money through a nonprofit that then hands it to the buyer is not allowed; Congress banned that arrangement for FHA loans in 2008.³

The One Exception: A Gift of Equity from Family

If a family member sells you a home for less than its appraised value, the difference between the appraised value and the sale price counts as a gift of equity. Fannie Mae allows that equity to fund all or part of the down payment and closing costs.⁴ If a parent sells you a home appraised at $300,000 for $270,000, that $30,000 gap gives you a 10% equity position at closing without any cash changing hands.

Gifts of equity are limited to primary residences and second homes and cannot be counted toward financial reserves. Expect the lender to document the family relationship and confirm the gift is not a disguised loan.⁴

What a Seller Can Pay For Instead

The seller can cover most of the costs you would otherwise bring to the closing table. Fannie Mae calls these interested party contributions, and they include closing costs, prepaid expenses, and up to 12 months of homeowners association assessments after settlement.¹ A seller credit can go toward loan origination fees, title insurance, recording charges, escrow deposits for property taxes and insurance, and discount points that lower your interest rate.

For FHA loans, the seller can pay origination fees, closing costs, prepaids, discount points, permanent and temporary rate buydowns, mortgage interest payments, and the upfront mortgage insurance premium.² Every dollar the seller absorbs is a dollar you keep for the down payment.

What sellers cannot cover, even inside the caps, are items that look like personal benefits: furniture, cars, decorator allowances, moving expenses. Fannie Mae treats those as sales concessions, and their value must be deducted from the sale price before the loan-to-value ratio is calculated, which can shrink the loan amount you qualify for.¹

Contribution Caps by Loan Type

Every program caps seller contributions based on the lower of the sale price or the appraised value.

Conventional Loans

Fannie Mae’s caps scale with your down payment on a primary residence or second home:

Less than 10% down (LTV above 90%): up to 3%
10% to just under 25% down (LTV 75.01% to 90%): up to 6%
25% or more down (LTV at or below 75%): up to 9%

Investment properties are capped at 2% regardless of down payment.¹ That 2% rarely covers all closing costs on a rental purchase, so investor buyers should plan around it.

FHA Loans

FHA allows up to 6% in interested party contributions regardless of the down payment amount.² With a minimum FHA down payment of 3.5% for borrowers at 580 credit score or higher, the 6% cap is usually enough to cover the buyer’s full closing cost burden.

VA Loans

VA rules split the concept. There is no dollar limit on seller credits applied to normal closing costs like appraisal fees, title charges, and recording fees. What the VA caps at 4% of the reasonable value shown on the VA Notice of Value are concessions, meaning anything of value beyond standard closing costs. Items that count against the 4% include the VA funding fee, payoff of the buyer’s debts, prepaid hazard insurance, and temporary rate buydowns.⁵ Standard market-rate discount points fall outside the 4% cap.

USDA Loans

USDA Rural Development loans allow seller contributions of up to 6% of the sale price, applied to eligible loan purposes like closing costs and prepaids. Concessions for repairs must be held in escrow, and contributions cannot pay the buyer’s personal debts or include personal property.⁶

What Happens When a Credit Exceeds the Cap

Going over the concession limit does not kill the deal, but it does shrink the loan. Under FHA rules, every dollar above the 6% cap reduces the sale price used for the loan-to-value calculation on a dollar-for-dollar basis.² Fannie Mae handles it the same way.¹

A separate limit catches some buyers by surprise. A seller credit can never exceed your actual closing costs and prepaids. If the seller agrees to a $12,000 credit but your closing costs total $9,000, you do not pocket the $3,000 difference. No program lets the buyer walk away with cash from a seller concession; the credit simply drops to match your real expenses.

Using a Seller Credit for a Rate Buydown

One of the more strategic uses of a seller concession is funding a temporary rate buydown, often structured as a 2-1 buydown that cuts your rate by two points in year one and one point in year two before the note rate takes over. Fannie Mae permits sellers to fund these buydowns within the same IPC limits.⁷ FHA counts buydown costs inside its 6% cap.²

The lender must qualify you at the full note rate, not the reduced rate, so a buydown will not help you qualify for a larger loan. It gives you lower payments in the first years. The buydown funds must sit in a custodial account before closing and cannot be applied to reduce the loan amount for LTV purposes.⁷ Permanent discount points funded by the seller work similarly, and on a VA loan they sit outside the 4% concession cap.⁵

The Appraisal Risk

Large seller credits draw appraiser attention. The market value definition used for Fannie Mae and Freddie Mac appraisals requires that the price reflect normal consideration unaffected by special financing or sales concessions.⁸ The appraiser reviews the sales contract, sees the credit, and looks at whether the agreed price has been inflated to absorb it. If comparable sales closed for less without concessions, the appraiser may adjust downward.

A low appraisal creates a gap the lender will not finance. You would need to renegotiate the price, cover the difference in cash, or walk away. Agreeing to pay an above-market price so the seller can hand a large credit back is the exact pattern appraisers are trained to flag.⁸ Remember that contribution caps run off the lower of sale price or appraised value: a $400,000 contract that appraises at $390,000 means your 3% conventional cap is calculated on $390,000.

How the Credit Appears at Closing

The Closing Disclosure, delivered at least three business days before closing, is where the credit becomes official. The seller’s contribution appears in the “Paid Already by or on Behalf of Borrower at Closing” section and reduces your cash to close.⁹ On the CFPB’s sample form, the seller credit is line 05 of Section L and flows into the Cash to Close calculation on page three.¹⁰

Compare the Closing Disclosure against your Loan Estimate. If the credit amount does not match what you negotiated, or was applied to different items than agreed, raise it with the lender before signing. At settlement, the closing agent deducts the credit from the seller’s proceeds and applies it to your obligations, so neither side writes a separate check for it.

1
Fannie Mae. B3-4.1-02, Interested Party Contributions (IPCs)
2
U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower
3
Federal Register. Federal Housing Administration – Prohibited Sources of Minimum Cash Investment Under the National Housing Act – Interpretive Rule
4
Fannie Mae. B3-4.3-05, Gifts of Equity
5
U.S. Department of Veterans Affairs. VA Funding Fee and Loan Closing Costs
6
USDA Rural Development. HB-1-3555 – Chapter 6, Loan Purposes
7
Fannie Mae. B2-1.4-04, Temporary Interest Rate Buydowns
8
Freddie Mac. Considering Financing and Sales Concessions – A Practical Guide for Appraisers
9
Consumer Financial Protection Bureau. Closing Disclosure Explainer
10
Consumer Financial Protection Bureau. Closing Disclosure Form