A seller credit is money the seller agrees to put toward your closing costs instead of handing you cash or cutting the sale price. It shows up as a line-item reduction on your settlement statement, lowering the amount you need to bring to closing. How much a seller can contribute depends on your loan program and down payment, with caps running from 2% to 9% of the sale price.
What the Credit Can Pay For
A seller credit applies against legitimate closing expenses and prepaid items. You never receive the money as a cash refund.
Eligible lender and third-party fees include loan origination charges, the appraisal, title insurance, attorney fees, recording fees, and inspection costs. The credit can also cover prepaid items such as the initial escrow deposit for property taxes and homeowner’s insurance, which on its own can run into thousands of dollars.
FHA borrowers get one extra use for the credit: the seller’s contribution can cover the upfront mortgage insurance premium, which equals roughly 1.75% of the loan amount. On a $350,000 FHA loan, that single item adds about $6,125 to your closing costs, and shifting it to the seller frees up a meaningful amount of cash.1U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower
Credit vs. Price Reduction
If you’re short on cash at closing, a credit usually beats a price cut of the same size. A $10,000 price reduction on a $400,000 home only lowers your cash needed at closing by your down payment percentage on that $10,000. Putting 5% down? That price cut saves you $500 up front. A $10,000 seller credit, by contrast, reduces your closing costs dollar for dollar.
The tradeoff is that you finance the full original price, so your loan balance and monthly payment are marginally higher. For buyers who qualify comfortably on income but are stretched on liquid savings, that’s usually a fair exchange.
How Much the Seller Can Contribute
Every major loan program caps seller contributions to prevent artificially inflated sale prices. The cap is calculated on the lower of the sale price or the appraised value, not the loan amount.
Conventional Loans
Fannie Mae and Freddie Mac use a tiered system based on your loan-to-value ratio. For a primary residence or second home:
- Less than 10% down (LTV above 90%): 3% maximum
- 10% to 24.99% down (LTV between 75.01% and 90%): 6% maximum
- 25% or more down (LTV of 75% or less): 9% maximum
Investment properties are capped at 2% regardless of down payment.2Fannie Mae. Interested Party Contributions (IPCs) Fees the seller customarily pays in your market, such as certain transfer taxes or title fees, generally sit outside these limits.
FHA Loans
FHA uses a single 6% cap on contributions from the seller or any other interested party, including the agent or builder. The 6% covers closing costs, prepaid items, discount points, and the upfront mortgage insurance premium. If contributions exceed 6%, the excess reduces the sale price dollar for dollar before the lender calculates the loan-to-value ratio, which shrinks the loan amount you can borrow.1U.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 rules work differently. The VA does not limit how much the seller can pay toward normal closing costs like title insurance, the appraisal, origination fees, and recording fees. The seller can cover all of those without restriction.3Veterans Affairs. VA Funding Fee and Loan Closing Costs
A separate 4% cap applies to what the VA calls seller concessions: anything of value beyond standard closing costs. That bucket includes the VA funding fee, payoff of the buyer’s debts, prepaid hazard insurance, interest rate buydowns, HOA fees, and gifts such as appliances or furniture. A seller can therefore pay all your closing costs and still add up to 4% in concessions on top.3Veterans Affairs. VA Funding Fee and Loan Closing Costs
USDA Loans
USDA guaranteed loans allow seller contributions up to 6% of the sale price, covering closing costs, prepaid items, and other eligible loan purposes.4USDA Rural Development. HB-1-3555 Chapter 6 Loan Purposes
Two Ways the Credit Can Get Cut
Even an agreed-upon credit can shrink during underwriting. Two situations cause it.
A low appraisal. Because the cap is calculated on the lower of sale price or appraised value, an appraisal below the contract price pulls the maximum credit down with it. If you agreed to buy at $400,000 with a 3% credit ($12,000) and the appraisal comes in at $385,000, the lender recalculates the cap at $11,550 and the underwriter will require the credit to be reduced. A low appraisal also raises your LTV, which can push you into a lower concession tier or demand a bigger down payment. At that point the deal usually gets renegotiated: a price cut from the seller, more cash from you, or some mix of the two.2Fannie Mae. Interested Party Contributions (IPCs)
A credit larger than your actual costs. You cannot pocket leftover credit as cash. If you negotiate $15,000 but your real closing costs are $12,000, the credit is cut to $12,000. Under Fannie Mae’s rules, any excess is treated as a sales concession and deducted from the sale price, which lowers the LTV calculation and can ripple into your loan terms. Ask your loan officer for a closing cost estimate before fixing a credit amount, so you aim close to the real number.2Fannie Mae. Interested Party Contributions (IPCs)
Getting the Credit Into the Contract and Onto the Closing Disclosure
The credit has to be documented in the purchase contract, either in the original offer or through a written addendum. Spell out the dollar amount and state that the credit applies toward the buyer’s closing costs and prepaid items. Vague language invites underwriting pushback. The underwriter will read the contract to confirm the credit stays within program limits and only pays for eligible expenses.
At closing, the credit appears on your Closing Disclosure as a line-item adjustment that reduces your cash to close. You receive the Closing Disclosure at least three business days before closing; use that window to confirm the credit amount matches your contract and sits on the right line items.5Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions If something looks wrong, raise it with your lender or closing agent before you sign.
The Long-Term Cost
A seller credit does not reduce your loan balance. Your mortgage is still based on the purchase price minus your down payment, so your monthly payment reflects the full financed amount. Over a 30-year loan, financing $12,000 in costs you could have paid in cash adds roughly $25,000 to $30,000 in total interest at current rates. That is the price of keeping cash in your pocket on move-in day, and for most buyers who are liquidity-constrained rather than income-constrained, it is worth paying.