Seller credit for repairs: how it works at closing

What is a seller credit for repairs, and where does it show up at closing?

A seller credit for repairs is money the seller puts toward your closing costs instead of fixing what the inspection found. You don't get a check. It shows up as one line, "Seller Credit," on page 3 of your Closing Disclosure, and it lowers the cash you bring to closing. Ask for a credit sized to your priced repair list, and keep it under both your closing costs and your loan's cap.

Key takeaways

• A repair credit pays closing costs, which frees your own cash to hire a contractor after you move in.
• It can't be larger than your closing costs, and conventional loans cap it at 3% to 9% on a home you'll live in (6% on Federal Housing Administration (FHA) loans).
• Any amount over either limit gets knocked off the price for the loan math, so it never reaches you as cash.

How much credit should you ask for?

The total of your priced repair list, not a round number. The listing agent will ask where your figure came from, and a list of findings with a dollar amount on each is hard to wave away.

Get contractor quotes on the big items and price the rest. Kept prices every line of an inspection report for $79, usually under 4 hours. The home repair estimate template shows how to lay the list out, and what to ask for after a home inspection covers which items are worth including.

Then check the total against your cap and a rough closing-cost figure from your Loan Estimate. If it runs over, split the ask into a credit and a price cut. Seller credit vs. price reduction runs the payment math on each. Your contract sets the deadline for the request and how it gets written up, so confirm both with your agent.

Where exactly will I see the credit?

On your Closing Disclosure, the form your lender must give you three business days before your scheduled closing. The Consumer Financial Protection Bureau (CFPB) describes the Seller Credit line as "the amount the seller has agreed to contribute to your closing costs."

If the seller agreed to pay specific costs instead of a lump sum, such as your title fees, those can appear as "Seller Paid" line items on page 2. Either way, the CFPB's advice is to "check that your Seller Credit reflects what you agreed upon with the seller" before you sign. Compare it line by line with your repair addendum.

Can you get a repair credit as cash back at closing?

No. Seller money can go toward your closing costs and prepaids, not your down payment and not your pocket. Fannie Mae's rules limit it to "Borrower closing costs, including prepaids," plus up to 12 months of homeowners association (HOA) dues. It can't be used for your down payment or the cash reserves your lender wants you to have.

Prepaids give a credit more room than people expect. The CFPB lists interest on your loan from closing to the end of that month, and it's common to pay your first year's homeowner's insurance premium up front too.

How much can a seller credit be?

Every loan program caps seller contributions. Fannie Mae sets its limit as a share of the lower of the price or the appraised value, based on your loan-to-value (LTV) ratio.

Sources: Fannie Mae Selling Guide, Housing and Urban Development (HUD) Handbook 4000.1.

Because the cap uses the lower of price and value, a low appraisal shrinks it. On FHA loans, HUD treats "repair allowances" as an inducement to purchase, so ask your loan officer how to word the credit before you sign.

What happens if the credit is bigger than your closing costs?

The extra doesn't turn into cash. Fannie Mae says "any amount exceeding the borrower's closing costs must be treated as a sales concession," which gets deducted from the sales price before the lender checks your loan again. The same happens to anything over the cap.

Here's how that plays out on a $300,000 home with 5% down:

Your $285,000 loan is now 95.8% of $297,500 instead of 95%. That can push you past your loan's limit and force a last-minute fix. The cleaner deal is an $8,500 credit plus a $2,500 price reduction, written that way from the start.

Can a repair credit pay for the repairs themselves?

Not directly. The credit covers closing costs, and the cash you would have spent on those stays in your account. You then hire whoever you want, on your schedule, after you own the house.

That's the main reason buyers prefer a credit over asking the seller to do the work. The seller has every reason to pick the cheapest contractor. If your lender requires a finding to be fixed before closing, though, a credit won't satisfy that, and you need the repair itself. Repairs vs. credit vs. price reduction walks through that choice.

Does a seller credit lower the purchase price?

Not up to your closing costs and cap: the price and your loan stay the same, and only your cash to close drops. The one exception is any amount over your closing costs or your cap, which is treated as a price cut, as in the $300,000 example above.

Can a seller credit cover HOA dues?

Yes, on a conventional loan. Fannie Mae allows it for homeowners association (HOA) dues covering up to 12 months after closing, and that counts toward the same cap.

If your window is closing and you need a real number behind your credit request, upload your inspection report to Kept.

Sources

• Fannie Mae Selling Guide B3-4.1-02, Interested Party Contributions
• Consumer Financial Protection Bureau, Closing Disclosure explainer
• HUD Handbook 4000.1, Update 18