Dermal Fibroblast Progenitors (DFPs) differentiate into distinct fibroblast lineages during skin development. However, the mechanisms that regulate lineage commitment of naive dermal progenitors to form niches around the hair follicle, dermis, and hypodermis, are unknown. In our study, we used multimodal single-cell approaches, epigenetic assays, and allografting techniques to define a DFP state and the mechanisms that govern its differentiation potential. Our results indicate that the overall chromatin profile of DFPs is repressed by H3K27me3 and has inaccessible chromatin at lineage specific genes. Surprisingly, the repressed chromatin profile of DFPs renders them unable to reform skin in allograft assays despite their multipotent potential. Distinct fibroblast lineages, such as the dermal papilla and adipocytes contained specific chromatin profiles that were de-repressed during late embryogenesis by the H3K27-me3 demethylase, Kdm6b/Jmjd3. Tissue-specific deletion of Kdm6b/Jmjd3 resulted in ablating the adipocyte compartment and inhibiting mature dermal papilla functions in single-cell-RNA-seq, ChIPseq, and allografting assays. Altogether our studies reveal a mechanistic multimodal understanding of how DFPs differentiate into distinct fibroblast lineages, and we provide a novel multiomic search-tool within skinregeneration.org.