Seller-Paid Closing Cost Limits by Loan Type: FHA, VA, USDA

Seller-paid closing cost limits vary by loan type. Conventional loans backed by Fannie Mae or Freddie Mac allow 3% to 9% of the property’s value, depending on the buyer’s down payment. FHA and USDA loans cap contributions at 6%. VA loans work differently: there is no cap on what the seller can pay toward standard closing costs, but a separate 4% limit applies to other concessions. Investment properties are held to 2% regardless of loan program. Every cap is calculated on the lower of the sale price or the appraised value.

Conventional Loan Caps by Down Payment

Fannie Mae and Freddie Mac tie the seller’s maximum contribution to the loan-to-value ratio. A larger down payment unlocks a larger allowable credit:

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

The percentage applies to the lower of the sale price or appraised value, and the caps cover both primary residences and second homes. On a $400,000 home with 5% down, the seller can contribute up to $12,000. On the same home with 25% down, the ceiling rises to $36,000.¹

Jumbo loans sit outside the conforming rules, so Fannie and Freddie caps don’t apply. Each lender writes its own concession policy, often somewhere in the 3% to 6% range. Ask your loan officer for the specific limit before you negotiate.

FHA Loans: 6%

FHA allows the seller to contribute up to 6% of the sale price or appraised value, whichever is lower.² That 6% can cover the origination fee, closing costs, prepaid items, discount points, and the upfront mortgage insurance premium. If the credit exceeds actual closing costs or exceeds 6%, the excess is subtracted from the property’s adjusted value before the LTV ratio is calculated, which can shrink the maximum loan amount.

VA Loans: No Cap on Standard Costs, 4% on Concessions

VA rules split seller contributions into two buckets. For standard closing costs, including the origination fee, appraisal, title insurance, recording fees, and discount points, the VA sets no cap on what the seller can pay.³

A separate 4% cap applies to “seller concessions,” defined as anything of value added to the transaction beyond normal closing costs. That bucket includes payment of the VA funding fee, payoff of the buyer’s existing debts, prepayment of the buyer’s hazard insurance, and seller-funded temporary interest rate buy-downs.⁴ The 4% is measured against the home’s reasonable value on the VA Notice of Value.³

USDA Loans: 6%

USDA Rural Development caps seller and other interested-party contributions at 6% of the sale price. Eligible uses include closing costs, prepaid items, and discount points. The credit cannot pay off a buyer’s personal debt or cover non-real-estate items like furniture or vehicles.⁵ Fees customarily paid by the seller, including real estate commissions, don’t count against the 6%.⁶

Investment Properties: 2%

If you’re buying a non-owner-occupied property with a conventional loan, the cap is 2% of the lower of the sale price or appraised value, no matter how large your down payment or how strong your credit.¹ The tighter cap applies across investment property types, including single-family rentals and multi-unit buildings.

What Sellers Can and Can’t Pay For

Seller contributions, formally called interested party contributions, can be applied to most transaction-related expenses: the loan origination fee (usually 0.5% to 1% of the loan amount), appraisal fees (typically $300 to $500 on a standard single-family home), title insurance, credit report fees, flood certification fees, and the initial funding of escrow accounts for taxes and homeowner’s insurance. Prepaid HOA dues and prorated property taxes also qualify.

One line doesn’t move for any loan program: seller credits cannot be applied to the buyer’s down payment. The buyer has to bring their own minimum equity, which is a fixed requirement of federal lending rules and private mortgage insurance guidelines.

How the Appraisal Changes the Dollar Cap

Because every major program calculates the cap on the lower of sale price or appraised value, a low appraisal can shrink the credit before the deal even closes. Say a buyer contracts for $350,000 with a 6% seller credit written into the offer. If the appraisal comes back at $340,000, the 6% is measured against $340,000, capping the credit at $20,400 rather than $21,000.¹

A large concession can also work against the appraisal itself. If an appraiser concludes a comparable sale closed above market because of a heavy seller credit, they can adjust that comparable downward, which pulls the subject property’s appraised value down and further compresses both the credit ceiling and the maximum loan amount.

When the Credit Exceeds Actual Costs or the Cap

A seller credit cannot exceed the buyer’s actual closing costs. Agree to $10,000 in credits against $8,000 in real costs, and the leftover $2,000 doesn’t come to the buyer in cash. Under Fannie Mae rules, the excess is reclassified as a sales concession and subtracted from the property’s sale price. The lender then recalculates LTV against the reduced price, which can affect approval or force a larger down payment.¹

The same treatment applies when the credit tops the program cap. If a seller offers 5% on a conventional loan where the buyer’s LTV only permits 3%, that extra 2% becomes a sales concession, the sale price gets reduced by that amount, and LTV is redone. The practical takeaway: negotiate a credit sized to the buyer’s real costs, not the maximum the program allows on paper.

Using the Credit to Buy Down the Rate

Seller credits don’t have to sit on closing-cost line items. Buyers often direct them toward a rate reduction instead, either permanent or temporary.

Permanent reductions use discount points. Each point costs 1% of the loan amount and typically drops the rate by about 0.25 percentage points. Seller-paid points count against the applicable IPC cap for every loan program.¹

Temporary buy-downs reduce the interest rate for the first one to three years. In a 2-1 buy-down, the rate is two points below the note rate in year one, one point below in year two, then reverts to the full rate in year three. The seller escrows the cost at closing. On a conventional loan, the buy-down counts toward the standard IPC caps.⁷ On a VA loan, a temporary buy-down falls under the 4% concession cap rather than the unlimited closing-cost bucket.⁴

1
Fannie Mae. Interested Party Contributions (IPCs)
2
U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower
3
Veterans Affairs. VA Funding Fee and Loan Closing Costs
4
U.S. Department of Veterans Affairs. Temporary Buydowns – VA Home Loans
5
USDA Rural Development. HB-1-3555 Chapter 6 – Loan Purposes
6
Rural Development – USDA. Loan Purposes and Restrictions
7
Fannie Mae. Temporary Interest Rate Buydowns