Seller Concession Limits: How Much Can Home Buyers Ask For?
Key Takeaways
- •Conventional loan concession caps depend on down payment size: 3% of the purchase price below 10% down, 6% for down payments of 10–24.99%, and 9% for down payments of 25% or more, while investment properties are capped at 2%.
- •FHA loans allow seller concessions up to 6% of the lesser of the purchase price or appraised value regardless of down payment size, VA loans cap concessions other than standard closing costs at 4% of appraised value, and USDA loans cap them at 6% of the purchase price.
- •Seller concessions cannot be applied to the down payment and, across every loan program, generally cannot exceed the allowable closing costs on the loan.
- •If closing costs come in lower than the negotiated concessions, buyers can use the surplus to buy down their mortgage rate or negotiate a reduced sale price rather than forfeit the excess credit.
- •Most loan programs base concession limits on the lesser of the purchase price or appraised value, so a low appraisal typically reduces the maximum seller credit a buyer can receive.
Seller concessions — also called seller credits, and known as interested party contributions in conventional lending — are money a home seller agrees to contribute toward the buyer's closing costs and other purchase expenses. Seller concessions are running near record highs in today's buyer's market, which means buyers shopping for a home have a good chance of negotiating credits or other assistance for their purchase. There is one important caveat: every major loan program caps concessions at a small share of the purchase price.
Those caps matter. If you ask for more than your loan program allows, your lender will reduce your concessions at closing, and you will receive less than you expected. The caps are written into the guidelines lenders must follow — Fannie Mae and Freddie Mac set them for conventional loans, while HUD, the Department of Veterans Affairs and the Department of Agriculture set them for FHA, VA and USDA loans respectively. Becoming familiar with the seller concession limits for your loan program before you start talking with the seller puts you in a stronger negotiating position.
Seller concession limits at a glance
| Loan type | Max seller concession | Key condition |
|---|---|---|
| Conventional (< 10% down) | 3% of purchase price | Primary or second home |
| Conventional (10–24.99% down) | 6% of purchase price | Primary or second home |
| Conventional (25%+ down) | 9% of purchase price | Primary or second home |
| Conventional (investment) | 2% of purchase price | Investment properties only |
| FHA | 6% of purchase price | Based on lesser of sale price or appraised value |
| VA | 4% + all closing costs | 4% cap on concessions; no cap on standard closing costs |
| USDA | 6% of purchase price | Cannot exceed actual closing costs; limit doesn't apply to payments for repairs |
Conventional loan seller concession limits
For buyers purchasing a primary home or a second home with a conventional loan, the cap on concessions depends on the size of the down payment. Concessions are limited to 3% when the down payment is under 10%, to 6% when the down payment falls between 10% and 24.99%, and to 9% when the down payment is 25% or greater.
The dollar amounts can be significant. On a $450,000 home purchased with a 5% down payment, the maximum concessions are $13,500. With a 20% down payment, the buyer can receive up to $27,000 in concessions.
Concessions are calculated as a percentage of the purchase price or the appraised value, whichever is lower. They can be used to cover closing costs, prepaid expenses, and up to 12 months of homeowners association fees. Concessions cannot be applied to the down payment, used to expand cash reserves, or counted toward the minimum borrower contribution.
FHA loan seller concession limits
Unlike conventional loans, FHA loans do not limit concessions based on down payment size. The maximum seller concession is 6% of the purchase price or the appraised value, whichever is lower — and that holds true even for buyers making the minimum possible down payment of 3.5%.
"If you are really needing that additional assistance because you don't have a ton of money saved, it may be in your best interest to go in on an FHA loan," says Ashley Harris, director of homebuyer education at Neighbors Bank.
On an FHA loan, seller concessions can be used to cover closing costs, prepaid expenses, and discount points. They can also pay the upfront Mortgage Insurance Premium (MIP), though in that case the full amount must be paid in cash at closing; the premium cannot be split between upfront and financed payments.
Seller concessions cannot pay any part of the down payment, and they cannot be used for moving expenses, paying off debts, or repairs that are not mandated by the FHA.
VA loan seller concession limits
VA loans place no limit on seller-paid closing costs, but they limit other seller concessions to 4% of the property's appraised value.
Standard closing costs that a seller can pay without limits include the VA appraisal fee, discount points and rate buydowns, the loan origination fee, taxes, title insurance, and recording fees. Paying off debts or paying the VA funding fee are considered concessions and are subject to the 4% cap.
USDA loan seller concession limits
Seller concessions on a USDA loan cannot exceed 6% of the purchase price and must be used for eligible closing costs rather than extra incentives such as paying off debts. The 6% limit does not apply to money the seller deposits into an escrow account to pay for repairs.
One rule that applies to every loan type
Regardless of the loan program, seller concessions typically cannot exceed the allowable closing costs on the loan. That means buyers who negotiate generous concessions and later learn that their closing costs will be lower than expected may have to give up part of what the seller agreed to provide. Seller credits appear as a line item on both the Loan Estimate and the Closing Disclosure, so buyers can compare the credit they negotiated with what actually arrives at closing.
"We see that happen often. You get an estimate from your lender typically on closing costs, but a lot of those items are outside of their control and are items that you can shop for. So they can put in a great estimate for homeowners insurance, but you might get it for a lot cheaper. And now all of a sudden, rather than needing 5% towards closing costs, you only need 4%, but you negotiated 5%. Well, that money is not money that you can just take home with you," Harris says.
Buyers do have a couple of fallback options. Suppose you are buying a house for $400,000 and negotiated $20,000 in concessions, only to find out your closing costs will total just $16,000. You could use the remaining $4,000 to buy down your rate, bringing your closing costs up to $20,000, because rate buydowns are generally an eligible closing expense. Alternatively, you could negotiate with the seller to reduce the sale price to $396,000, saving $4,000 on the purchase.
How to make the most of your concession limit
To use seller concessions to your full advantage, take stock of your closing budget and identify where you would benefit most from the seller's contribution:
- Confirm the limits. Talk to your lender to confirm the concession limit for your loan type, find out which items are eligible to be covered by concessions, and review your closing costs estimate.
- Assess your cash position. Consider whether you have enough cash saved to bring to the closing table for homeowners insurance, fees, and more. If not, it likely makes sense to use a seller credit to reduce these upfront expenses.
- Explore rate options. Look into discount points and temporary rate buydown options to see what they cost and how they would affect your monthly payment. You may want to use some of your negotiated concessions to make your mortgage payment more affordable, either in the short or long term.
- Check other eligible uses. If your loan program allows seller concessions to go toward repair allowances or paying off debts, think about whether these uses would add breathing room to your budget as you move into your new home.
Seller concession limits: Frequently asked questions
How much in seller concessions can I ask for on a conventional loan?
You can ask for 3% of the purchase price if you're putting less than 10% down, 6% if you're putting 10% through 24.99% down, and 9% if you're putting 25% or more down. That assumes the property will be your primary residence or second home, not an investment property.
Can seller concessions exceed my closing costs?
Seller concessions generally can't exceed the allowable closing costs on your loan. In addition, concessions must stay within the limits set by each loan program.
Do seller concession limits change based on the purchase price?
Yes. Loan programs set seller concession limits as percentages of the purchase price, so the limits change if the purchase price changes. For example, if you buy a $400,000 home with a conventional loan and a 5% down payment, seller concessions are limited to 3% of the purchase price, or $12,000. If the purchase price changes to $300,000 and you are still making a 5% down payment, then seller concessions can't be higher than $9,000.
Can I get seller concessions on an investment property?
Yes. If you buy an investment property with a conventional loan, you can get seller concessions of up to 2% of the lesser of the purchase price or the appraised value. Portfolio lenders set their own rules and may allow concessions on investment properties of up to 6% in some cases.
What happens if the home appraises below the purchase price?
If the home appraises below the purchase price, the maximum possible seller concessions will typically go down. Most loan programs tie seller concession limits to the lesser of the appraised value and the purchase price, or to the appraised value. In the case of USDA loans, where the limit is based on the purchase price, an appraisal gap will often lead to renegotiating the purchase price, thereby reducing the maximum seller concessions.
Source: Yahoo Finance
