Overview

Seller‑financed down payment assistance lets a seller directly help a buyer cover some or all of the cash needed at closing. That help can take three common forms: a direct short‑term loan from seller to buyer, a credit at closing (seller concession), or the seller paying certain closing costs. This option can speed a sale and expand the pool of qualified buyers, but it also triggers lender underwriting checks and program limits. For general consumer guidance see the Consumer Financial Protection Bureau (CFPB) and HUD (U.S. Department of Housing and Urban Development) resources (https://www.consumerfinance.gov/, https://www.hud.gov/).

How it works (example)

  • Purchase price: $300,000
  • Typical 20% down: $60,000
  • Seller agrees to finance $20,000 (loan or concession)
  • Buyer must still qualify for the mortgage based on debt, income, assets, and any added seller loan payments

If the seller gives a true gift it may be treated differently than a seller loan or concession — lenders require documentation and will check whether the assistance is allowed under the mortgage program.

Lender and program rules you must know

  • Conventional loans (Fannie Mae / Freddie Mac): seller concessions are allowed but limited by down payment amount; lenders follow Fannie Mae/Freddie Mac guidance on maximum seller contributions and require full disclosure (see Fannie Mae and Freddie Mac program guides).
  • FHA loans: sellers may pay allowable closing costs and concessions (FHA commonly permits seller contributions up to a set percentage of the sales price for certain costs), but direct seller gifts for a buyer’s down payment are treated differently and must comply with FHA rules (see HUD/FHA guidance).
  • VA and USDA loans: each program has its own limits and restrictions on seller concessions and financing. Always confirm with the lender and program handbook.

Because program limits change, verify current caps and documentation requirements with your lender and consult HUD/CFPB guidance before relying on seller help (https://www.fanniemae.com/, https://www.freddiemac.com/, https://www.hud.gov/).

Common structures and documentation

  • Seller concession (credit at closing): Seller agrees to pay specified closing costs or provide a credit toward the buyer’s cash due. This is the most common, but total concessions are capped by program rules.
  • Seller installment (carryback) loan: Seller lends money to the buyer for part of the purchase price or down payment and a promissory note and mortgage/deed of trust secure repayment. This can complicate mortgage underwriting and may require lender approval or payoff at closing.
  • Gift vs. loan: Lenders need written proof of source. Gifts typically require a donor letter; seller “gifts” are scrutinized because seller‑funded gifts can be disallowed by some programs.

Practical considerations and risks

  • Qualification: Lenders underwrite based on your credit, income, assets, and any new payment obligations created by seller financing. A seller loan may increase your debt‑to‑income ratio.
  • Appraisal and market risk: Sellers offering assistance in a soft market may accept longer closing timelines or lower offers; buyers should still order a full appraisal.
  • Legal and tax issues: Seller loans and concessions can have tax implications for both parties. The IRS treats certain seller financing arrangements and forgiven debt in specific ways; consult a tax advisor or CPA for specifics (https://www.irs.gov/).
  • Fraud and rescue concerns: Beware of arrangements that appear designed to circumvent lending rules or present false documentation. Use licensed professionals and insist on full disclosure.

Negotiation and documentation tips (professional tips)

  1. Put it in writing: Include the assistance amount, form (credit, loan, or paid costs), repayment terms, and any contingencies in the purchase agreement.
  2. Talk to the lender early: Some lenders will not accept seller‑provided down payment funds or will treat them as a loan that must be disclosed or paid off. Get lender pre‑approval that specifically allows the assistance.
  3. Understand program limits: Confirm acceptable seller contributions with your lender for the mortgage program you plan to use (conventional, FHA, VA, USDA).
  4. Use escrow and title professionals: Have the funds and any promissory note handled through escrow to ensure proper recording and payment flow.
  5. Get independent advice: Consult a real estate attorney or CPA to review tax and legal consequences.

Short case example

A buyer had $30,000 saved toward a 20% down payment on a $300,000 home. The seller agreed to a $15,000 seller concession toward closing and prepaid costs. The lender accepted the concession, required documentation, and the buyer closed with no seller promissory note. The concession lowered the buyer’s required cash at closing but did not change the loan amount or the lender’s underwriting of monthly payments.

Red flags

  • Seller insists on undocumented or back‑dated gifts.
  • Seller wants payments outside escrow or requests private side agreements that aren’t recorded.
  • Lender refuses to accept the stated assistance — always confirm acceptance in writing.

Frequently asked questions

  • Can a seller just “gift” my down payment? Some programs prohibit seller gifts as down payment; gifts usually must come from family, employer, or approved nonprofit sources. Check your lender and loan program rules (HUD/CFPB guidance).
  • Will seller financing hurt my loan approval? It can if the seller loan increases your monthly obligations or causes documentation problems. Full disclosure to the lender is essential.
  • Are there tax consequences? Yes. Seller carrying a loan may create interest income to the seller; forgiven or restructured debt can be taxable. Consult IRS guidance or a tax professional (https://www.irs.gov/).

Internal resources

For deeper reading on related topics see FinHelp’s guides on seller financing and negotiating terms:

Next steps

If you’re considering seller‑funded help, tell your lender at pre‑approval, document everything in the purchase contract, and ask for written confirmation that the mortgage program accepts the proposed assistance. Work with your real estate agent, escrow/title company, and a tax or legal professional to close safely.

Professional disclaimer

This article is educational and does not replace personalized legal, tax, or mortgage advice. Policies and program limits change; consult your lender, tax advisor, or real estate attorney for guidance specific to your situation.

Authoritative sources