Buyer concessions are money the seller agrees to pay at closing toward the buyer’s loan and settlement costs. The credit shows up on the closing statement and reduces the cash the buyer has to bring. It never passes through the buyer’s hands, and it cannot be used for the down payment. Every loan program caps how much a seller can contribute, with limits ranging from 2% to 9% of the purchase price depending on the loan type and how much the buyer is putting down.
What a Concession Pays For
A concession is a separate credit at closing, not a price reduction. The funds flow directly to the service providers and prepaid accounts shown on the Closing Disclosure. Typical items a seller concession can cover:
- Loan origination fees charged by the lender to process and underwrite the mortgage.
- Discount points, which are prepaid interest used to lower the permanent rate.
- Appraisal and credit report fees.
- Title insurance premiums for both the lender’s and owner’s policies.
- Settlement fees, including attorney, escrow, or closing agent charges.
- Prepaid items such as initial escrow deposits for property taxes and homeowner’s insurance.
One thing a concession cannot fund is the buyer’s down payment. The down payment has to come from the buyer’s own verified funds because it establishes the buyer’s equity stake in the property. FHA calls this the minimum required investment, and seller contributions cannot be applied toward it.1U.S. Department of Housing and Urban Development. FHA FAQ – What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower
How Much a Seller Can Contribute
Every loan program caps seller contributions, and the caps vary more than most buyers expect. Exceeding the limit doesn’t just reduce the concession. It can force a renegotiation, shrink the loan amount, or kill the deal.
Conventional Loans
Fannie Mae ties the cap to loan-to-value, using the lower of the sales price or appraised value:
- Less than 10% down (LTV above 90%): up to 3%.
- 10% to 25% down (LTV 75.01%–90%): up to 6%.
- 25% or more down (LTV 75% or less): up to 9%.
- Investment property at any LTV: up to 2%.
The investment property cap catches people off guard. A buyer purchasing a rental with 25% down might assume they get the 9% tier, but the 2% ceiling applies regardless of down payment size. On a $300,000 property, that’s $6,000 of seller help, maximum.
FHA Loans
FHA allows seller contributions of up to 6% of the sales price, regardless of down payment. The 6% can go toward origination fees, closing costs, prepaid items, and discount points.1U.S. Department of Housing and Urban Development. FHA FAQ – What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower
VA Loans
VA draws a hard line between two categories. There is no cap on how much a seller can pay toward the buyer’s standard loan-related closing costs. The seller could cover every penny of those without restriction. The 4% cap applies only to seller concessions, which the VA defines as items of value added beyond standard closing costs. Items that fall under the 4% include credits toward the VA funding fee, paying off the buyer’s debts, and prepaying the buyer’s hazard insurance. The 4% is measured against the home’s reasonable value, not the loan amount.3Veterans Affairs. VA Funding Fee and Loan Closing Costs
USDA Loans
USDA Rural Development guaranteed loans allow seller contributions of up to 6% of the sales price. Real estate commissions and other fees the seller typically pays under local custom don’t count toward that cap. Contributions cannot fund personal debts or inducements like furniture bundled into the deal.4USDA Rural Development. Chapter 6 Loan Purposes
What Happens If the Concession Exceeds Your Costs or the Cap
Buyers who negotiate aggressively sometimes end up with a concession larger than their actual closing costs. The buyer never pockets the difference. Under Fannie Mae’s rules, financing concessions must be equal to or less than the sum of the borrower’s closing costs. Anything above that gets treated as a sales concession, which the lender deducts from the property’s value when calculating LTV. That deduction can shrink the maximum loan size.2Fannie Mae. Interested Party Contributions (IPCs) – Fannie Mae Selling Guide
The same thing happens when the negotiated concession exceeds the program’s percentage cap. A buyer with 5% down on a conventional loan who negotiates a 5% seller contribution will only see 3%, because that’s the cap. The excess 2% is either deducted from the property value for LTV purposes or simply forfeited. The buyer gets no benefit either way. Know your cap before you negotiate, and ask the lender for a closing cost estimate so you request an amount that fits within the limit and matches what you’ll actually owe.
The Price-Inflation Trade-Off
Sellers rarely absorb concessions out of generosity. When a buyer asks for $10,000 in closing cost help, the seller often counters with a $10,000 higher purchase price. A $400,000 home becomes a $410,000 sale with a $10,000 concession built in. The seller nets the same proceeds, and the buyer skips writing a $10,000 check at closing.
The catch is that the mortgage is now based on $410,000 instead of $400,000. Over 30 years at 7%, that extra $10,000 in principal costs roughly $14,000 in additional interest. The concession saves cash today and raises monthly payments for the life of the loan. Whether that math makes sense depends on whether the alternative is delaying the purchase.
The Appraisal Risk
Padding the price only works if the appraisal supports the higher number. The lender uses the lower of the contract price or the appraised value. If the $410,000 sale appraises at $400,000, the lender runs LTV off $400,000, and the concession math falls apart.
From there, the parties can renegotiate the price down to the appraised value, which usually means shrinking or eliminating the concession. The buyer can cover the difference out of pocket. Or the deal collapses. The risk grows as the requested concession gets larger relative to the home’s value. An inflated contract price also doesn’t create equity. Starting with a $410,000 mortgage on a $400,000 home means the buyer is underwater on paper until appreciation or principal payments close the gap.
Using a Concession for a Rate Buydown
Seller concessions are often used to fund a temporary interest rate buydown, most commonly a 2-1 buydown. The seller prepays part of the buyer’s interest at closing, lowering the buyer’s effective rate for the first two years of the loan. With a 2-1, the buyer pays 2% below the note rate in year one and 1% below in year two. After that, the full note rate applies for the rest of the term. The seller’s contribution sits in an escrow account and covers the monthly difference as it comes due.
The cost of the buydown counts toward the applicable concession cap. On a $400,000 loan at 7%, a 2-1 buydown runs roughly $9,000 to $11,000. A conventional buyer putting less than 10% down would have to fit that cost inside the 3% cap along with any other closing costs the seller is covering. Run the numbers with the lender before writing the offer.
Buyer Agent Commissions After the NAR Settlement
The 2024 NAR settlement changed how buyer agent compensation is handled, and seller concessions are now a common vehicle for it. Buyers negotiate their own agent’s fee separately, and that fee can be funded through a seller concession if both sides agree.
The major loan programs have clarified that seller-paid buyer agent commissions generally don’t count toward the concession caps when they reflect customary practice. FHA stated that if sellers continue paying buyer-side agent fees consistent with state and local custom, and the amounts are reasonable, those payments aren’t treated as interested party contributions under the 6% limit.5U.S. Department of Housing and Urban Development. FHA INFO 2024-12 The VA took the same position for the 4% cap.6Veterans Affairs. VA Circular 26-24-14 Fannie Mae’s selling guide excludes common and customary seller-paid fees from the interested party contribution limits as well.2Fannie Mae. Interested Party Contributions (IPCs) – Fannie Mae Selling Guide
In practice, a conventional buyer with 5% down and a 3% concession cap can still receive seller-paid help with the buyer agent fee on top of 3% in closing cost assistance, as long as the commission reflects local norms.
Negotiating and Documenting the Concession
The concession request goes in the initial purchase offer and gets formalized in the purchase and sale agreement. The contract should specify either a fixed dollar amount or a percentage of the sales price. A fixed figure like “$12,000 seller contribution toward buyer’s closing costs” is usually cleaner than a percentage, since a percentage can shift if the price moves during negotiations.
The contract language has to match what the loan program allows. An FHA buyer’s contract shouldn’t reference concession terms that only apply to conventional loans. Underwriters compare the purchase agreement to the Closing Disclosure line by line, and vague or conflicting language can delay or sink the approval. If the concession amount changes late in the process, the impact on timing is usually minimal; the Closing Disclosure only triggers a new three-day waiting period when the APR becomes inaccurate, the loan product changes, or a prepayment penalty is added.7Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions
When Asking for a Concession Helps, and When It Hurts
Concessions are most useful when a buyer qualifies for the monthly payment but is short on the cash needed at closing. In slower markets where homes sit, sellers tend to be more open to them. Listing agents sometimes advertise concessions upfront as an incentive, especially on new construction where builders can absorb the cost across their margins.
In a competitive market, a concession request can weaken the offer. If a seller is choosing between two similar offers and one asks for 3% back while the other doesn’t, the clean offer usually wins. Some buyers in hot markets skip the concession and negotiate a lower purchase price instead, which gets to the same net cost without concession caps or appraisal risk in the way.
The weakest use of concessions is requesting more than your actual closing costs just because the cap allows it. Any excess either gets deducted from the property’s value for loan purposes or disappears. Work backward from the lender’s closing cost estimate, add a small cushion for adjustments, and request that amount.