"Does the Seller's Prorated Property Tax Credit Count Against the Seller Concession Limit?"

No. A legitimate prorated real estate tax credit does not count against the seller concession ceiling in places where property taxes are billed in arrears. Fannie Mae and Freddie Mac both leave it off the list of interested party contributions. The seller is settling up for the months they owned the home, so that money lowers your cash at closing and leaves the ceiling where it was.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, licensed in fifteen states, NMLS #483943, through C2 Financial Corporation.

On a fall or winter closing in a county that bills taxes for a year already behind it, the seller's share of the coming bill can be one of the largest numbers on the settlement statement. When everyone at the table assumes it counts as a seller credit, the closing-cost help gets cut back for no reason at all.

What is a prorated property tax credit, and why does the seller owe you one?

In a lot of the country, a property tax bill arrives after the period it covers. The county assesses the property, the bill comes out months later, and whoever owns the home when it arrives is the one who pays it. That timing is what "paid in arrears" means.

So a buyer who closes in the middle of a tax year inherits a bill that covers time the seller lived there. The closing attorney or the title company handles that by prorating the tax between the two of you, and the seller's share comes to you as a credit on the settlement statement. You pay the whole bill when it arrives, and you were handed the seller's portion in advance.

That credit is an accounting of who owed what. It is different from a seller agreeing to help with your closing costs, which is a negotiated contribution and has nothing to do with the calendar. What a seller concession actually is covers the negotiated side of it.

Where does the tax credit fit inside the seller concession rules?

Both agencies group seller help, builder help and agent rebates under one heading, interested party contributions, and then cap the part of it that pays your closing costs. The capped part carries its own name in the guides, a financing concession, which is an interested party's money applied to what you owe at the table. Both agencies also publish a short list of things excluded from the heading entirely, and a prorated tax credit is on it.

Fannie Mae's B3-4.1-02, Interested Party Contributions (IPCs), revised 05/07/2025, lists under IPC Exclusions: "A legitimate pro-rated real estate tax credit in places where real estate taxes are paid in arrears."

Freddie Mac's Single-Family Seller/Servicer Guide Section 5501.6, revised 07/01/2026, reaches the same place from its own exceptions list: "Real estate tax credits: Prorated real estate tax credits contributed by the property seller in areas where real estate taxes are paid in arrears."

If the seller credits you $4,000 for their months of the tax year and separately agrees to put $6,000 toward your closing costs, only the $6,000 is measured against the ceiling. The tax proration stays outside it. The cap on what a seller can contribute covers how that ceiling gets set for your program and your down payment, and I am not printing the percentages here because they move.

What makes a tax credit legitimate?

Fannie Mae's wording is "a legitimate pro-rated real estate tax credit," and the guide does not define the word any further in that list. The plain reading is that the proration has to be a real one. The number should reflect the seller's actual share of the tax period, figured the way your contract and local custom say to figure it, and it should be readable as its own line on the closing statement.

A number written into a contract as a tax credit that is larger than the seller's share is a seller contribution with a different label on it. Whoever underwrites the file reads the settlement statement, sees a proration that does not match the seller's months of ownership, and treats the excess as what it is. That is worth getting right while the contract is being drafted, because it is much harder to unwind once the closing figures are drawn.

What else do the guides leave out of the concession math?

The exclusion lists are short and worth knowing, because each item is money that reaches you without spending any of the ceiling.

What it is	Where it falls
A legitimate prorated real estate tax credit in an arrears area	Excluded from interested party contributions
A lender credit that comes from premium pricing, meaning a higher interest rate	Excluded, even where the lender is an interested party
A gift of equity or gift funds from a related person who is also the seller	Excluded when the gift requirements in the guides are met
Fees for a standby or forward commitment a builder arranged with a lender ahead of your contract	Excluded, because it was arranged before your contract existed
Seller-paid fees that are common and customary in your area	Not subject to the maximum financing concession limits

The last row is worth reading twice. Fannie Mae's B3-4.1-02 says typical fees and closing costs paid by a seller in accordance with local custom are not subject to its maximum financing concession limits. Freddie Mac's 5501.6 carries the same idea in its own exceptions to those limits. In a state where the seller customarily pays for the owner's title policy or the transfer tax, that spending is not eating your ceiling either. Why a closing-cost estimate changes so much by state shows how far those customs vary.

How to set this up while the contract is still being written

1. You'll want to know whether your county bills property taxes in arrears or in advance, because the exclusion is written for arrears areas and the proration runs the other direction where the bill comes first. The county treasurer or assessor publishes the tax calendar, and the closing attorney or title company knows it cold.
2. Please ask the closing attorney or title company for a draft settlement statement that shows the tax proration on its own line, with the tax period and the number of days it covers. That is the document the file will be read against.
3. You'll want the purchase contract to keep the tax proration and the closing-cost credit as two separate items with two separate numbers. One combined figure invites the whole amount to be counted, and there is no way to recover the difference later.
4. You'll want to size the closing-cost credit against an itemized estimate of your actual costs, because a financing concession cannot exceed what you actually owe at the table and the excess is lost rather than paid out to you. What closing costs are made of is the list to size it against.
5. Please ask whoever is working on your loan to confirm the ceiling for your program and your down payment before the offer goes in. That takes one reply, and it is the number the rest of the structure gets built around.

What usually goes wrong

Writing both numbers as one line. A contract that says the seller pays $10,000 toward the buyer's costs, with no breakdown, gives underwriting nothing to separate. All of it gets measured against the ceiling, including the part that was only ever the seller's own tax bill.

Treating the credit as spending money. The proration lowers what you wire on closing day. Your down payment and your reserves get documented from your own accounts long before then, so a credit that appears at the table does not go toward either one.

Assuming every county bills in arrears. Plenty of places bill in advance, and there the seller has already paid for months they will not own the home, so the proration runs toward the seller and you reimburse them. The agency exclusion is written for arrears areas, so the direction of the proration is worth confirming before anybody counts on it.

Stacking the tax credit on top of a full-ceiling closing-cost credit and calling it done. The proration is outside the ceiling, and the closing-cost credit still has to stay inside it and still cannot exceed your actual costs.

Forgetting what the credit does to the escrow account. Getting the seller's share in hand at closing does not change what gets collected for the escrow account or what next year's bill looks like. How an escrow account collects and pays your taxes covers that side, and what happens to your property taxes after you buy covers the reassessment that can follow a sale.

An illustration, so the two numbers are clear

The numbers below are made up to show the mechanism. This is not a real file and it is not a prediction about your purchase.

A home is under contract at $400,000 in a county that bills property taxes for the calendar year in the following spring. The annual tax on the property runs $4,800. Closing is set for mid October, so the seller will have owned the home for about nine and a half months of the tax year, and their share works out to roughly $3,800. Separately, the seller agreed to put $6,000 toward your closing costs and prepaid items.

Written correctly, the contract and the settlement statement carry two lines. The $3,800 tax proration falls outside the interested party contribution math because the taxes are billed in arrears. The $6,000 closing-cost credit is a financing concession, so it counts against the ceiling for your program and your down payment, and it cannot exceed your actual costs at the table.

Written as one $9,800 line with no breakdown, the file has a harder problem. Underwriting reads $9,800 of seller contribution and measures the whole thing against the ceiling, and $3,800 of that was never a contribution. The fix at that point is usually to cut the closing-cost credit to fit, which costs you real money for a paperwork reason.

If the seller's money would go further as a rate reduction than as cash back at the table, putting a credit toward cash to close or toward a rate buydown walks through that comparison. If the seller or builder has also offered to cover association dues, how many months of association dues a seller can pay covers that one, which counts inside the ceiling.

Where to start

The seller-credit conversation gets much easier once the loan itself is understood, because the real question underneath it is how much of your own money the credit is replacing. You can see pricing for your own scenario with no credit pull, no account, and nobody calling you afterward. You will see several options on one sheet, and you can choose the option that works best for you. That selection can change as the file comes together.

No letter from anyone is a loan commitment. Final approval depends on the property, the appraisal and full underwriting.

Common questions

Does a prorated property tax credit count as a seller concession?

No, as long as it is a real proration and your area bills property taxes in arrears. Fannie Mae's B3-4.1-02 puts "a legitimate pro-rated real estate tax credit in places where real estate taxes are paid in arrears" on its list of IPC Exclusions. Freddie Mac's Section 5501.6 does the same, listing prorated real estate tax credits from the property seller among the contributions its interested party rules do not reach. The credit still shows on the settlement statement. It simply is not measured against the ceiling that covers a seller's help with your closing costs.

What does it mean for property taxes to be paid in arrears?

It means the tax bill arrives after the period it covers rather than before it. A county that bills in arrears sends a bill in one year for the year that just finished, or partway through a year for time already gone by. Whoever owns the home when the bill arrives is the one who pays it, which is why a mid-year closing needs the tax split between the seller and the buyer. Your county treasurer or assessor publishes the tax calendar.

Can a seller give me a bigger tax credit than the actual prorated amount?

They can write a bigger number into the contract, and the extra will not be treated as part of the proration. Fannie Mae's exclusion is worded for a legitimate prorated credit, so the amount that matches the seller's share of the tax period is what stays outside the concession math. Anything above that is a seller contribution under a different name, and whoever underwrites the file will read it that way off the settlement statement. Keeping the proration at the seller's actual share and asking for the rest as a closing-cost credit gets you the same dollars with no surprise late in the file.

Does the tax proration reduce my down payment?

No. It lowers the total you bring to closing, which is a different number. Your down payment and your reserves are documented from your own accounts well before closing day, out of bank statements the file already holds, so a credit that appears on the settlement statement does not count toward either one. The wire you send is smaller, and what the file needs to see from your own funds stays the same.

Do seller-paid fees that are customary in my state count against the cap?

Generally not. Fannie Mae's B3-4.1-02 says typical fees and closing costs paid by a seller in accordance with local custom, known as common and customary fees or costs, are not subject to its maximum financing concessions. Freddie Mac's 5501.6 does the same, excluding from its limits the fees or costs customarily paid by the property seller according to local convention. Which fees are customary is a state and county question and it changes real dollars, so the closing attorney or title company handling your purchase is the right place to confirm it for your address.

What happens if the tax proration and the closing-cost credit are written as one number?

The whole amount gets measured against the concession ceiling, because nothing on the paperwork separates the two. The fix is easy while the contract is still in draft. Please ask for the tax proration and the closing-cost credit to appear as two separate items, each with its own number, and ask the closing attorney or title company to carry them as two lines on the settlement statement. Written that way, the file shows which dollars were a contribution and which were only the seller's own tax bill.