The Hidden Hassle of Repair Credits: Why You Won’t Get Cash at Closing

During the homebuying process, inspection issues often lead to repair negotiations between the buyer and seller.

One option for buyers is to ask for a repair credit instead of having the seller arrange the fixes themselves.

"This is becoming more common now, because there is a much larger inventory, and buyers are asking for more repair credits when making offers," says real estate agent and investor Ron Myers of Ron Buys Florida Homes.

While this concession is one both buyers and sellers can agree on, many new homebuyers misunderstand that repair credits offset fees rather than provide cold, hard cash. It’s important to understand how they work and budget for repair costs accordingly.

What repair credits are and what they can go toward

Repair credits are funds offered by the seller in lieu of fixing issues before closing, and are usually negotiated after a home inspection.

"Repair credits usually come up when something major is found—like a roof that needs work, an AC on its last leg, or plumbing and electrical issues," says Myers. "Instead of the seller fixing those things, the buyer often asks for a credit to help cover the cost."

This gives the buyer the freedom to hire their preferred contractor and complete the repairs on their own schedule.

"Strategically, a credit can be more flexible, allowing the buyer to prioritize what matters most once they take possession," says Felipe Freig, founder and CEO of Versa Homes.

Credits must be documented in the purchase agreement, and can come with some limitations.

"It’s important for buyers to understand that repair credits rarely cover 100% of repair costs," says Freig. "Most sellers are negotiating to offset some of the expense, not fund the entire project."

Additionally, some lenders may cap repair credits. "For example, FHA, VA, and conventional loans typically restrict repair credits to a maximum percentage of the home’s price," says Freig.

Lenders may also dictate how credits are applied, like mandating their use for closing costs exclusively.

How repair credits are applied at closing

Many buyers are surprised to learn that repair credits aren't handed out in cash.

"Per lender rules, buyers cannot receive cash back at closing from a seller, as that would be considered a kickback," says Cara Ameer, a real estate agent licensed in both Florida and California.

Instead, repair credits reduce fees like closing costs or lower the actual loan amount.

"In my opinion, using a credit towards closing costs is the ideal, as that will actually leave the money in the buyer's pocket to do the fix after closing," says real estate agent Jennifer Vokolek of Re/Max DFW Associates. "But it's a negotiable point, and could be applied to the sales price which would reduce the buyer's loan amount."

A repair credit is applied on the settlement statement and offsets a buyer's fees. "It's a credit to the buyer that reduces the amount of money they have to bring to the closing table," says real estate agent Debra Dobbs of The Dobbs Group at Compass in Chicago.

Repair credits must be approved by the lender and properly documented by escrow to be valid.

"Lenders scrutinize credits because they can impact the property’s appraised value or the buyer’s loan-to-value ratio," says Freig. "Title and escrow companies also need to reflect credits correctly on the settlement statement to prevent legal or financial discrepancies."

Tips on budgeting for repairs before you receive credit

Because repair credits aren't paid in cash, it's important for buyers to set aside cash reserves to cover urgent fixes immediately after move-in.

 "It's smart for buyers to get estimates during or after the inspection, so they'll know how much the necessary repairs will actually cost," says Myers.

However, there may be some repairs where there is unknown or hidden damage that can’t be determined until the actual repair work begins.

"This is especially true with anything involving a leak, wood rot and/or termite damage or roof work," warns Ameer—so you should also reserve a financial buffer for unforeseen expenses.

Negotiating repair credits to offset closing costs means you won’t spend as much upfront, giving you extra funds to tackle repairs right away.

"When planning repairs, prioritize safety and structural items over cosmetic upgrades to protect your investment," advises Freig. "Electrical hazards, plumbing leaks, roof damage, and HVAC failures can compromise habitability or escalate costs if ignored. Cosmetic upgrades, while appealing, should come second."

To avoid any last-minute surprises, consult your real estate agent or lender to understand exactly how repair credits will be applied in your deal, so that you can plan accordingly.