On a VA loan, a seller can contribute up to 4% of the home’s appraised value in concessions, plus an unlimited amount toward standard closing costs as long as each charge is reasonable and customary for the area. Because those are two separate buckets, total seller contributions on a VA purchase often run well above 4% of the home’s value. The trick is knowing which payments the VA classifies as concessions and which sit outside the cap entirely.
How the 4% Cap Works
The VA splits seller payments into two categories: concessions and closing costs. Concessions are anything of value added to the transaction beyond the normal costs of getting the loan closed, and they’re capped at 4% of the home’s “reasonable value,” which is the appraised value documented on the Notice of Value.1Veterans Affairs. VA Funding Fee And Loan Closing Costs
The reasonable value drives the math, not the contract price. Agree to $310,000 on a home the VA appraises at $300,000, and your concession ceiling is $12,000. Paying a higher price does not buy you more concession room.
Standard closing costs sit in the second bucket with no percentage cap. That’s why a seller who pays $8,000 in closing costs and $12,000 in concessions on a $300,000 home has contributed $20,000, and the deal is fully compliant.
What Counts Toward the 4%
The VA defines a concession as anything of value added to the transaction at no additional cost to the buyer.1Veterans Affairs. VA Funding Fee And Loan Closing Costs In practice, the items that eat into your 4% are:
- VA funding fee. This one-time fee ranges from 1.25% to 3.3% of the loan amount depending on down payment and prior VA loan use. On a $300,000 loan with no down payment on first use, the funding fee alone is $6,450 (2.15%), more than half the concession room on a $300,000 appraisal.1Veterans Affairs. VA Funding Fee And Loan Closing Costs
- Debt payoffs. If the seller pays off a credit card, car loan, or medical debt to help you qualify, every dollar counts.
- Prepaid hazard insurance and property tax escrows beyond what’s due at closing.1Veterans Affairs. VA Funding Fee And Loan Closing Costs
- Gifts and personal property. Appliances, furniture, or other items thrown in get assigned a fair market value that hits the concession total.
- Temporary interest rate buydowns. A 2-1 or 3-2-1 buydown, where funds go into escrow to temporarily reduce your monthly payment, is a concession when the seller or builder funds it.2U.S. Department of Veterans Affairs. Temporary Buydowns – VA Home Loans
The funding fee catches people off guard. Veterans routinely ask the seller to cover it without realizing it’s a concession rather than a closing cost. On a subsequent-use loan with no down payment, that fee climbs to 3.3%, leaving almost nothing under the cap for anything else.
What Doesn’t Count Against the Cap
Sellers can pay the following costs with no dollar limit beyond what’s reasonable for the area, and none of them touch your 4%:
- Loan origination fee
- VA appraisal fee
- Credit report fee
- Title insurance and title search
- Recording fees
- State and local transfer taxes
- Pro-rated property taxes due at closing
These are treated as normal transaction expenses rather than inducements.1Veterans Affairs. VA Funding Fee And Loan Closing Costs The line between pro-rated taxes due at closing (not a concession) and future tax escrows (a concession) matters more than it sounds. If the seller covers six months of future taxes as part of the deal, that prepayment eats into your 4%.
Permanent Discount Points
Permanent discount points, which buy down your rate for the life of the loan, sit on the closing-cost side. A seller paying points to lower your rate from 6.5% to 6% is not making a concession under VA rules. The regulation at 38 CFR 36.4312 addresses discount points as permissible charges, and they fall outside the concession framework.3eCFR. 38 CFR 36.4312 – Interest Rates Because savings over a 30-year mortgage can be substantial and the payment doesn’t touch the cap, permanent points are one of the strongest tools in VA negotiations.
Temporary vs. Permanent Buydowns
Temporary buydowns and permanent discount points sound alike, but the VA treats them differently. A permanent buydown through discount points is a closing cost. A temporary buydown, like a 2-1 that drops your rate two points the first year and one point the second, is a concession because the funds sit in an escrow account that subsidizes payments rather than permanently changing loan terms.2U.S. Department of Veterans Affairs. Temporary Buydowns – VA Home Loans On a $400,000 home, a 2-1 buydown might cost $8,000 to $10,000 in escrowed funds, which is the bulk of a $16,000 concession cap before the funding fee is even in the picture.
Buyer-Broker Commissions
After the 2024 changes to real estate commission practices, the VA addressed buyer-agent commissions directly in Circular 26-24-14: seller payment of buyer-broker charges is not treated as a seller concession.4Veterans Benefits Administration. Temporary Local Variance for Certain Buyer-Broker Charges The circular remains in effect until rescinded. A seller can cover the buyer’s agent commission and still offer the full 4% in concessions plus unlimited closing costs.
When the Appraisal Comes In Low
Because the cap is tied to reasonable value rather than contract price, a low appraisal shrinks your ceiling. Under contract at $350,000 with an appraisal at $325,000, your maximum concessions drop from $14,000 to $13,000. A deal carefully structured to use the full 4% of the contract price can suddenly be over the limit.
At that point, you have three options: renegotiate the price down to the appraised value, restructure concessions to fit within 4% of the new value, or pay the difference out of pocket. Every VA purchase contract must include the VA Escape Clause, which protects you from being forced to complete a purchase when the appraised value comes in below the contract price.5U.S. Department of Veterans Affairs. VA Escape Clause – VA Home Loans Without that clause, the VA will not guarantee the loan.
What Happens If Concessions Exceed 4%
The VA will not guarantee a loan where concessions exceed 4% of the reasonable value. The deal doesn’t die automatically, but it can’t close as written. The lender will flag the overage and require the parties to restructure. Common fixes: reduce the concession amount, reclassify costs that were miscategorized as concessions, remove gifts or personal property, or shift a temporary buydown into permanent discount points that fall outside the cap.
That restructuring adds time and can create friction, especially when the seller has already committed to specific dollar amounts. Getting the classification right before the purchase agreement is signed avoids the scramble later. The breakdown of concessions versus closing costs belongs in front of a loan officer before you submit the offer, not after the appraisal.
A Worked Example
On a home appraised at $350,000 with a first-use VA purchase loan and no down payment, a fully optimized seller contribution might look like this:
- Concessions (up to 4% of $350,000 = $14,000): VA funding fee at 2.15% ($7,525), prepaid homeowners insurance ($1,800), and the remaining concession credit toward closing ($4,675).
- Closing costs (no cap): loan origination fee ($3,500), title insurance and search ($2,000), VA appraisal fee ($600), recording fees ($200), and permanent discount points ($3,500 for roughly 0.5 points).
- Buyer-broker commission (not a concession): agent commission ($10,500 at 3%).
The seller contributes roughly $34,300 in total, and the veteran walks in with nothing out of pocket. Concessions land at $14,000, right at the cap. Everything else sits outside it. The categories stack; they don’t compete.
Documenting Seller Contributions
The purchase agreement should spell out the exact dollar amount or percentage the seller will contribute and label each payment as either a closing cost or a concession. Vague wording like “seller to contribute toward buyer’s costs” delays underwriting because the lender has to verify the breakdown against the 4% limit before issuing approval.
Every seller contribution also has to appear on the Closing Disclosure, which replaced the HUD-1 settlement statement. Seller credits go in the “Seller-Paid” column, and lender credits go in the “Paid by Others” column.6Veterans Benefits Administration. Circular 26-17-11 That line-by-line breakdown is what the VA reviews to confirm the transaction complies with concession limits.