Interested Party Contributions in Mortgage: Limits by Loan Type

Interested party contribution limits on a mortgage run from 2% to 9% of the property’s value, and the exact cap depends on the loan program, whether you’ll live in the home, and how much you’re putting down. Conventional loans on a primary residence or second home allow 3%, 6%, or 9% based on your down payment; investment properties are held to 2%. FHA and USDA each cap contributions at 6% of the sales price. VA works differently: standard closing costs paid by the seller aren’t capped at all, but “seller concessions” as the VA defines them are capped at 4% of the home’s reasonable value.

The caps exist so a seller can’t inflate the price, hand the difference back as “closing help,” and leave the lender with a loan bigger than the home is worth. Get the structure wrong and the loan shrinks at underwriting, sometimes at the closing table.

Who Counts as an Interested Party

An interested party is anyone with a financial stake in the sale closing. Sellers are the obvious case, but the category also covers home builders, land developers, real estate agents, mortgage lenders, third-party loan originators, and affiliates of any of them.¹ If someone makes money when the deal closes, their contribution is capped.

People and entities that are not interested parties include family members giving a gift with no tie to the sale, employers offering relocation assistance, and government down payment assistance programs. Money from those sources follows different rules and generally isn’t counted against the IPC caps.

What the Money Can and Cannot Pay For

Eligible expenses are the ones tied directly to getting the mortgage and transferring the property: loan origination fees, discount points, title insurance, the appraisal, recording fees, prepaid property taxes, and homeowner’s insurance premiums going into escrow.¹

What contributions cannot cover is where deals go sideways. Decorating allowances, moving expenses, furniture, cars, and electronics are not closing costs. Lenders treat them as inducements to purchase, which signals an inflated price. If the purchase contract includes any of these, the lender reduces the property’s value dollar-for-dollar by that amount before calculating the loan. Underwriters spot them by reading the purchase agreement and the Closing Disclosure for anything that isn’t a standard settlement charge.

Conventional Loan Limits

Fannie Mae and Freddie Mac set caps based on occupancy and equity. The percentage applies to the lower of the purchase price or the appraised value, not the loan amount.²

For a primary residence or second home:

Down payment under 10% (LTV above 90%): capped at 3%
Down payment of 10% to 24.99% (LTV 75.01%–90%): capped at 6%
Down payment of 25% or more (LTV 75% or less): capped at 9%

Investment properties are capped at 2% no matter the down payment.² Second homes follow the same tiers as primary residences even though borrowers sometimes lump them in with investment properties.

There’s a second ceiling that catches people: the contribution can’t exceed your actual closing costs, even when it’s within the percentage cap. If a seller offers 3% on a high-LTV loan but your real closing costs come to 2.1%, the extra 0.9% is reclassified as a sales concession. The lender subtracts it from the purchase price and recalculates eligibility on the reduced figure.²

FHA Loan Limits

FHA allows interested parties to contribute up to 6% of the sales price toward closing costs, prepaid items, and discount points. That 6% umbrella also covers temporary and permanent interest rate buydowns, mortgage interest payments, and the upfront mortgage insurance premium.¹

When contributions go over the 6% cap or over the borrower’s actual closing costs, FHA treats the overage as an inducement to purchase. That triggers a dollar-for-dollar cut to the property’s adjusted value, and the loan-to-value ratio is applied to the lower number. A $300,000 home with $20,000 in contributions but only $17,000 in real closing costs would have $3,000 subtracted from its value before the loan is sized.¹

VA Loan Limits

The VA splits seller-paid money into two buckets, and the split matters more than in any other program. Standard closing costs (origination fees, discount points, title insurance, recording fees, the appraisal, property taxes) are not capped. The seller can pay all of them.³

What the VA caps at 4% of the home’s reasonable value are “seller concessions,” defined as anything of value added to the transaction at no cost to the buyer beyond standard closing costs. That includes credits for the VA funding fee, paying off the buyer’s debts, and prepayment of hazard insurance.³ Because the closing-cost side is uncapped, VA borrowers often end up with more total seller assistance than borrowers on any other program.

USDA Loan Limits

USDA Rural Development guaranteed loans cap interested party contributions at 6% of the sales price, matching FHA on the headline number.⁴ Several items sit outside that 6% calculation:

Lender-paid costs funded through premium pricing (a slightly higher rate in exchange for credit toward closing)
Seller-funded repairs held in escrow
The buyer’s real estate agent commission when paid by the seller

USDA prohibits using contributions to pay off the borrower’s personal debts and bars using them to include movable personal property like furniture, boats, or electronics. Standard household appliances that come with a typical sale are allowed.⁴

What Happens When Contributions Exceed the Limits

The result is the same across programs even though the mechanics differ slightly: the overage reduces the effective property value, which shrinks the maximum loan.

On conventional loans, any contribution above either the percentage cap or your actual closing costs is reclassified as a sales concession. The lender subtracts the excess from the purchase price and uses the lower of the reduced price or the appraised value to recalculate the LTV.² That can push you into a higher LTV tier, which lowers the IPC cap further and may require private mortgage insurance.

FHA and USDA apply a dollar-for-dollar reduction to the property’s adjusted value before the LTV percentage is calculated.¹ Either way, you qualify for less than you expected, and this is the scenario where deals fall apart at the last minute because the borrower has to bring more cash to closing.

How the Contribution Gets Documented

Every arrangement starts in the purchase agreement, which must state the exact dollar amount or percentage the interested party will pay. That number is what the lender measures against the program cap. Vague language like “seller will help with closing costs” is not enough; underwriters need a specific figure.

The number then appears on the Closing Disclosure, the final settlement document you receive before signing.⁵ The underwriter compares the Closing Disclosure against the purchase contract and the appraisal to confirm the numbers line up and stay within the cap. If the contract says 4% and the Closing Disclosure shows 5%, the loan stops moving until the figures are reconciled.

Tax Effect on Your Cost Basis

Seller-paid contributions have a tax consequence most buyers forget about until they sell. Your cost basis is what the IRS uses to figure capital gains on a future sale, and some contributions reduce it.

If the seller pays discount points on your mortgage, you have to reduce your basis by that amount.⁶ Lower basis, larger taxable gain later. On a $300,000 home where the seller paid $3,000 in points, your starting basis is $297,000; sell years later for $450,000 and the gain is calculated on $153,000 instead of $150,000.

Property taxes work the same way. If the seller paid taxes you owed and you didn’t reimburse them, your basis drops by that amount. If you paid taxes the seller owed without reimbursement, your basis goes up.⁷ Settlement fees for buying the property generally increase your basis, but loan-related costs like appraisal fees, credit report charges, and mortgage insurance premiums cannot be added to it.⁶

1
U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower
2
Fannie Mae. Interested Party Contributions (IPCs)
3
U.S. Department of Veterans Affairs. VA Funding Fee and Loan Closing Costs
4
USDA Rural Development. HB-1-3555, Chapter 6 – Loan Purposes
5
Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions (Closing Disclosure)
6
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
7
Internal Revenue Service. Publication 523 (2025), Selling Your Home