Seller concessions are a credit the seller agrees to pay toward the buyer’s closing costs, written into the purchase contract and applied as a line-item credit on the buyer’s Closing Disclosure at settlement.1Consumer Financial Protection Bureau. Closing Disclosure Explainer The credit lowers the cash a buyer needs on closing day and reduces the seller’s net proceeds by the same amount. Every major loan program caps how much the seller can contribute, and the cap depends on the loan type, the occupancy, and in some cases the down payment.
What a Concession Can Pay For
Concessions apply to the administrative and legal costs that come with closing on a home. The common items are loan origination fees, title insurance premiums, recording fees charged by the county clerk, attorney fees, and the appraisal. Buyers also use concession funds for the prepaid expenses lenders collect at settlement, like property taxes and homeowners insurance.
The credit never arrives as a check. It shows up on the buyer’s side of the Closing Disclosure, the standardized five-page settlement document the lender must deliver at least three business days before closing. The number on that line reduces the cash-to-close figure the buyer wires to the escrow agent or settlement attorney.
How Much the Seller Can Contribute
Each loan program sets its own ceiling. Going over doesn’t automatically kill the deal, but the excess is treated as a reduction to the sales price for underwriting, which can change the loan-to-value ratio and knock the financing off track.
Conventional (Fannie Mae and Freddie Mac)
Fannie Mae and Freddie Mac call these “interested party contributions,” and the cap scales with the buyer’s equity. Percentages apply to the lower of the sales price or appraised value:
- Down payment under 10% (LTV above 90%): maximum 3%
- Down payment of 10% to 25% (LTV 75.01%–90%): maximum 6%
- Down payment above 25% (LTV 75% or less): maximum 9%
- Investment properties: maximum 2%, regardless of down payment
Contributions within these limits are classified as financing concessions. Anything above the cap, or above the buyer’s actual closing costs, is reclassified as a sales concession and subtracted from the sales price before the lender runs its LTV math.2Fannie Mae. Interested Party Contributions (IPCs) That recalculation can push the loan into a higher LTV bracket, trigger mortgage insurance, or shrink the maximum loan amount.
FHA
FHA allows the seller to contribute up to 6% of the sales price or appraised value, whichever is lower.3U.S. Department of Housing and Urban Development. HUD 4000.1 Handbook The cap doesn’t change with the down payment. Every dollar above 6% is subtracted from the sales price before the LTV calculation.
VA
VA loans split the question in two. Standard seller-paid closing costs (title fees, origination, appraisal, recording) have no percentage cap as long as the charges are reasonable. Separately, seller concessions, defined by the VA as anything of value beyond normal closing costs, are capped at 4% of the home’s reasonable value. Items that count against the 4% include prepayment of the buyer’s property taxes and insurance, paying the VA funding fee on the buyer’s behalf, and paying off the buyer’s debts or judgments.4U.S. Department of Veterans Affairs. VA Funding Fee and Loan Closing Costs A VA seller can therefore cover a large block of ordinary closing costs and add another 4% in concessions on top, which often totals more help than other loan types permit.
USDA
USDA Rural Development loans cap seller contributions at 6% of the sales price. Funds must go to eligible loan purposes like closing costs and prepaids. The 6% does not include closing costs the lender pays through premium pricing or the upfront guarantee fee.5Rural Development. Loan Purposes and Restrictions
The Credit Can’t Exceed Your Actual Closing Costs
A concession has a second ceiling built in: it can’t exceed what the buyer actually owes at closing. If you negotiate a $10,000 credit but your closing costs total $7,500, you don’t pocket the $3,000 difference. Under Fannie Mae guidelines, the excess is treated as a sales concession and comes off the property’s sales price for LTV purposes.2Fannie Mae. Interested Party Contributions (IPCs) FHA and VA use similar logic. This is where deals go sideways. Buyers negotiate a round number without knowing their real costs, then scramble when the Closing Disclosure doesn’t match.
The practical fix is to get a detailed Loan Estimate early and ask for a concession close to the projected number. If the seller is willing to give more than you need in costs, direct the excess into discount points to buy down the rate. That raises your closing costs legitimately and keeps the concession in bounds.
Concession or Price Reduction?
Buyers often ask whether a $10,000 price cut would be better than a $10,000 concession. It depends on what’s tight: cash on hand or the monthly payment.
A price reduction shrinks the loan. On a 30-year mortgage at 7%, taking $10,000 off the purchase price saves roughly $24,000 in total interest and drops the monthly payment by about $67. A concession leaves the loan amount alone. The buyer finances the full price but needs less cash at the table. If income is solid and savings are thin, that trade is usually worth it. If cash isn’t the problem and you want the lowest payment, ask for the price cut.
A higher purchase price (with a concession) also gives the buyer a slightly higher cost basis in the property. On a primary residence, the $250,000 or $500,000 home sale exclusion typically makes that irrelevant. On investment property, the basis difference can matter.
Using a Concession to Buy Down the Rate
One of the strongest uses of a concession is funding an interest rate buydown, either permanent through discount points or temporary through a structured plan. Seller-paid discount points count against the interested-party-contribution caps like any other concession.2Fannie Mae. Interested Party Contributions (IPCs)
Temporary buydowns follow a set structure. A 2-1 buydown cuts the rate by 2 percentage points in year one and 1 point in year two, then the full note rate takes over. A 3-2-1 works the same way over three years. Fannie Mae permits temporary buydowns on fixed-rate mortgages for primary residences and second homes, with a maximum initial rate reduction of 3 percentage points and increases capped at 1 point per year.6Fannie Mae. Temporary Interest Rate Buydowns
Buydown funds sit in a custodial account at closing and are drawn down each month to top up the borrower’s reduced payment. One important detail: the lender qualifies the borrower at the full note rate, not the bought-down rate. A buydown doesn’t let you afford more house. It gives you room in the early years while income grows into the real payment.
Writing the Concession Into the Contract
The concession has to be in the purchase agreement or a signed addendum before the lender starts underwriting. Two standard formats work. A fixed dollar amount (“Seller shall credit Buyer $7,500 toward closing costs”) gives both sides certainty. A percentage (“Seller shall credit Buyer 3% of the final purchase price toward closing costs and prepaids”) adjusts automatically if the price moves during inspection negotiations.
Spell out that the funds apply only to closing costs, prepaids, or discount points. Loose terms like “seller assistance” create arguments at the table about which line items the credit covers. Once both sides sign, the title company or settlement attorney has to honor the figure on the Closing Disclosure.
Lenders usually want the signed concession document before issuing a formal loan commitment. If the concession is added later by addendum, the lender will likely re-verify the deal and may re-run the appraisal analysis, which pushes closing back.
What the Appraiser Does With It
Appraisers are trained to look past the concession and determine what the home is worth on the open market. If a buyer bumps the offer to absorb a credit (offering $310,000 with a $10,000 credit instead of $300,000 flat), the appraiser compares the property to similar homes that sold without concessions and adjusts.7Freddie Mac. Considering Financing and Sales Concessions: A Practical Guide for Appraisers
The concession is documented on the Uniform Residential Appraisal Report, and the appraiser notes whether the sales price looks influenced by the financing terms.8Fannie Mae. Uniform Residential Appraisal Report If the appraisal comes in below the contract price because the concession was stacked on top of fair market value, the buyer has three choices: cover the gap in cash, renegotiate, or walk. The lender will only lend against the appraised value.
When Sellers Actually Agree
Leverage follows the market. When inventory is rising and homes are sitting, sellers routinely offer concessions to stand out, and some advertise the credit directly in the MLS listing. In a tight market with multiple offers, asking for a concession can make your bid weaker than a clean, full-price offer.
New construction is the exception that holds in most markets. Builders have wider margins and prefer rate buydowns or closing cost credits over cutting the list price, because a lower list price drags down comparable values across the entire development. The concession conversation is almost always open with a builder.
The strongest buyer position outside of new construction is a home that has been on the market a while, has already had a price reduction, or has inspection issues the seller doesn’t want to deal with. Instead of asking the seller to fix a $5,000 roof problem, ask for a $5,000 closing cost credit. Same economics, no scramble to coordinate contractors before closing.