A buyer credit at closing is a dollar amount applied at settlement that reduces the cash you need to bring to the table. It usually comes from the seller or your lender, and it offsets specific transaction costs such as the appraisal, title insurance, recording fees, and escrow deposits. It cannot be used toward your minimum down payment, and every major loan program caps how much outside help you can receive.
Who Pays the Credit
The two common sources are the seller and the lender, and they work differently.
A seller credit, often called a concession, is money the seller agrees to put toward your closing costs, reducing their net proceeds from the sale. Concessions are typically negotiated with the initial offer or after a home inspection turns up repair items. Rather than making the repairs themselves, a seller may offer a credit so you can handle the work on your own schedule after closing.
A lender credit comes from your mortgage lender in exchange for a higher interest rate. You pay less upfront but more each month over the life of the loan. It is essentially the reverse of paying discount points to buy down a rate.1Consumer Financial Protection Bureau. How Should I Use Lender Credits and Points (Also Called Discount Points)? The credit appears as a negative number in Section J on page 2 of both your Loan Estimate and Closing Disclosure, so you can see exactly what you accepted in exchange for the higher rate.2Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions
One useful detail if you are stacking help from multiple sources: on conventional loans, lender credits from premium pricing are excluded from the interested party contribution limits that apply to seller concessions, so a lender credit can sit alongside the maximum allowed seller concession.3Fannie Mae. B3-4.1-02, Interested Party Contributions (IPCs)
What a Credit Can Pay For
Credits apply to the fees that pile up during a real estate closing. They fall into three broad groups:
- Loan-related costs, such as the lender’s origination fee, discount points, and the credit report fee.
- Third-party service fees, including the appraisal, title search and title insurance, government recording fees for the deed, flood zone certification, and attorney or settlement agent fees where required.
- Prepaids and escrow deposits, meaning per-diem interest from closing to the start of your first full payment cycle, plus the initial deposits your lender collects for future property tax and homeowners insurance payments.2Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions
A prorated real estate tax credit from the seller fits here too. If the seller occupied the home for part of the current tax period, they owe you a proportional reimbursement for taxes covering that time. When your lender sets up an escrow account, that prorated tax credit can offset some or all of the initial escrow deposit you would otherwise owe.4Fannie Mae. Selling Guide Announcement (SEL-2025-03)
What a Credit Cannot Do
Under every major loan program, a buyer credit cannot cover your minimum required down payment. That money must come from your own savings or an approved source such as gift funds. The rule exists so that you have a genuine financial stake in the property separate from anything negotiated into the deal.
You also do not pocket any excess. If a negotiated credit ends up larger than your actual closing costs, you do not receive the difference as cash back. Under Fannie Mae guidelines, a financing concession that exceeds total closing costs is reclassified as a sales concession and deducted from the sales price, and the lender recalculates your loan-to-value ratio using the reduced figure.3Fannie Mae. B3-4.1-02, Interested Party Contributions (IPCs) Estimate your closing costs carefully before asking for a specific credit. Overshooting does not put money in your pocket; it just complicates the file.
How Much Credit Your Loan Allows
Every major loan program caps how much an interested party, meaning the seller, builder, agent, or similar participant, can contribute toward your costs. The caps keep sale prices and loan-to-value ratios honest.
Conventional (Fannie Mae)
Fannie Mae ties the maximum financing concession to your loan-to-value ratio, calculated on the lower of sales price or appraised value. With a down payment under 10%, the cap is 3% of the sales price. With 10% to 25% down, the cap rises to 6%. Above 25% down, it is 9%. For investment properties, the cap is 2% regardless of down payment. Lender credits from premium pricing sit outside these limits.3Fannie Mae. B3-4.1-02, Interested Party Contributions (IPCs)
FHA
FHA-insured loans 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
VA loans work in two layers. The seller can pay all of your normal closing costs with no dollar cap. Anything beyond standard closing costs, such as paying your VA funding fee, paying off your existing debts, or prepaying hazard insurance, counts as a concession and is capped at 4% of the home’s reasonable value stated in the VA Notice of Value.6Veterans Affairs. VA Funding Fee and Loan Closing Costs
USDA
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 the Credit Shows Up on Your Paperwork
Your lender must deliver a Closing Disclosure at least three business days before closing, giving you time to review the final figures against your original Loan Estimate.8Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs Credits show up in a few spots:
- General lender credits appear as a negative number labeled “Lender Credits” in Section J on page 2, under Total Closing Costs.2Consumer 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 cost.9Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs – Section: Lender Credits
- Seller-paid costs appear in the “Paid by Others” column for each applicable line item, and seller credits also 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 pulls everything together. It combines total closing costs with the purchase price, then subtracts your earnest money and all applicable credits. The result is the exact amount to bring to closing by wire transfer or cashier’s check. Your settlement agent confirms those totals match the final loan approval before releasing funds.10Consumer Financial Protection Bureau. What Is a Closing Disclosure?
Tax Treatment
Seller-paid closing costs are generally not treated as taxable income to you. They can, however, affect your home’s cost basis, the figure used to calculate gain or loss when you later sell. If the seller pays points on your mortgage, that payment may reduce the seller’s amount realized rather than increase your taxable income. Costs the seller covers that would ordinarily 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 specific cost being credited, a short conversation with a tax professional before closing can help you track basis correctly from day one.