Buyer concessions are funds a seller agrees to pay at closing to cover some or all of a buyer’s transaction costs. The credit shows up on the settlement statement and reduces the cash the buyer has to bring to closing. Depending on the loan program and down payment, the seller can contribute anywhere from 2% to 9% of the purchase price, and the money is restricted to specific categories of expense.
How the Money Actually Moves
A concession is not a price cut and not a check to the buyer. It’s a credit the seller provides at closing that flows directly to the service providers and prepaid accounts listed on the Closing Disclosure. The buyer never sees the funds in a bank account.
Typical costs a seller concession can pay for:
- Loan origination fees charged by the lender.
- Discount points to lower the mortgage rate.
- Appraisal and credit report fees.
- Lender’s and owner’s title insurance.
- Attorney, escrow, or settlement agent charges.
- Initial escrow deposits for property taxes and homeowner’s insurance.
What a concession cannot do is fund the down payment. The down payment has to come from the buyer’s own verified funds, because it represents the buyer’s equity stake in the property. If the seller could hand over the down payment through a concession, the buyer would have no money at risk, and no major loan program permits that.
How Much a Seller Can Contribute
Every loan program caps concessions, and the limits vary more than most buyers expect. Exceeding the cap doesn’t just trim the concession; it can force a price renegotiation or unwind 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 surprises people. A buyer putting 25% down on a rental might assume they qualify for the 9% tier, but the 2% ceiling applies regardless of down payment. On a $300,000 rental, that’s $6,000 in seller help.
Financing concessions that exceed the cap get reclassified as “sales concessions” and are deducted from the property’s value for LTV purposes. The lender recalculates the loan using the reduced figure, which can lower the maximum loan amount.1Fannie Mae. Interested Party Contributions (IPCs) – Fannie Mae Selling Guide
FHA Loans
FHA sets a single flat cap: 6% of the sales price, regardless of down payment. It covers origination fees, closing costs, prepaid items, and discount points. It cannot be applied toward the borrower’s minimum required investment, which is FHA’s term for the down payment.2U.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 loans treat concessions differently from every other program. The VA splits seller help into two categories: normal closing costs and seller concessions. There is no cap on how much a seller can pay toward standard loan-related closing costs. A seller could cover all of those without limit.3Veterans Affairs. VA Funding Fee and Loan Closing Costs
The 4% cap applies only to what the VA specifically defines as concessions: anything of value added beyond standard closing costs. The 4% is measured against the home’s reasonable value, not the loan amount. Items that fall inside the 4% include credits toward the VA funding fee, paying off the buyer’s debts, and prepaying hazard insurance.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 customarily pays under local practice don’t count against that cap. Seller money can’t be used to pay off personal debts or bundle in inducements like furniture.4USDA Rural Development. Chapter 6 Loan Purposes
Buyer Agent Commissions After the 2024 Settlement
The 2024 NAR settlement shifted how buyer agent compensation gets handled. Buyers now negotiate their own agent’s fee separately, and sellers can still fund it through the purchase, often as a concession. The major loan programs have clarified that seller-paid buyer agent commissions generally don’t count against concession caps when they reflect customary practice.
FHA guidance states that if sellers continue paying buyer-side agent fees consistent with state and local custom, and the amounts are reasonable, those payments are not treated as interested party contributions under the 6% limit.5U.S. Department of Housing and Urban Development. FHA INFO 2024-12 The VA has taken the same position for its 4% cap.6Veterans Affairs. VA Circular 26-24-14 For conventional loans, the Fannie Mae selling guide excludes common and customary fees paid by the seller from the IPC limits.1Fannie 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 a buyer agent fee on top of the 3% in closing cost assistance, as long as the commission reflects local norms.
The Price Bump Trade-Off
Sellers rarely absorb concessions out of pure goodwill. When a buyer asks for $10,000 in closing cost help, the seller often counters with a $10,000 higher purchase price. A home that would have sold for $400,000 becomes a $410,000 sale with a concession built in. The seller nets the same amount, and the buyer avoids writing a $10,000 check at closing.
The catch is that the mortgage is now sized against $410,000 instead of $400,000. The buyer trades cash today for a larger loan and higher monthly payments for the life of the mortgage. Whether that math works depends on the alternative. If the choice is between a slightly larger loan or postponing the purchase for a year while saving cash, the concession often wins.
What Happens at the Appraisal
Bumping the price to fund a concession only works if the appraisal supports the higher number. The lender bases the loan on the lower of the contract price or the appraised value. If a $410,000 sale appraises at $400,000, the lender uses $400,000 for LTV, and the concession math falls apart.
The parties then have a few options: renegotiate the price down (which usually shrinks or wipes out the concession), have the buyer bring extra cash to close the gap, or walk. This is the largest risk in aggressively priced-up concession deals, and it grows with the size of the concession relative to the home’s value.
A padded price also doesn’t create equity. Market value is what a willing buyer would pay without the concession baked in. A $410,000 mortgage on a $400,000 home means the buyer starts underwater until appreciation or principal payments close the gap.
You Don’t Get the Leftover
A common misconception: negotiate a $15,000 concession, use only $11,000 at closing, pocket $4,000. That’s not how it works. The buyer never receives cash back from a concession under any circumstances.
Under Fannie Mae’s rules, financing concessions must be equal to or less than the borrower’s actual closing costs. Any excess gets reclassified as a sales concession and is deducted from the property’s value for LTV, which can shrink the maximum loan and push more cash onto the buyer.1Fannie Mae. Interested Party Contributions (IPCs) – Fannie Mae Selling Guide
The same principle applies when the negotiated amount exceeds the program cap. A buyer with 5% down on a conventional loan who negotiates a 5% seller contribution will only receive 3%, because that’s the ceiling. The extra 2% either reduces the property value for LTV or is forfeited. Either way, the buyer gets nothing for it. Ask the lender for a realistic closing cost estimate, add a modest cushion, and request an amount that’s both within the cap and close to what you’ll actually owe.
Concessions and Temporary Rate Buydowns
One increasingly common use of seller concessions is funding a temporary rate buydown, most often the 2-1 structure. The seller prepays a portion of the buyer’s mortgage interest at closing, and the buyer pays a rate 2% below the note rate in year one and 1% below in year two. In year three, the full rate takes over for the rest of the loan.
The money the seller puts up goes into an escrow account and gets disbursed to the loan servicer each month to cover the gap between what the buyer pays and what the note rate requires. On a $400,000 loan at 7%, a 2-1 buydown might run roughly $9,000 to $11,000, and that cost counts toward the applicable concession cap. A conventional buyer with less than 10% down would need that figure to fit inside the 3% ceiling along with any other closing costs the concession covers. Get the exact numbers from the lender before making the offer.
Getting It Into the Contract
A concession request goes into the initial purchase offer and gets formalized in the purchase and sale agreement. It should specify either a fixed dollar amount or a percentage of the sales price. A fixed number like “$12,000 seller contribution toward buyer’s closing costs” is usually cleaner than a percentage, because percentages shift if the price moves during negotiation.
The contract language has to match what the loan program actually allows. An FHA buyer’s contract shouldn’t reference concession terms that only exist under conventional rules. Underwriters compare the purchase agreement against the Closing Disclosure line by line, and vague or inconsistent language can delay or kill the approval.
If the concession amount adjusts late in the process, that alone usually doesn’t trigger a new three-day Closing Disclosure waiting period. Federal rules require a fresh waiting period when the APR becomes inaccurate, the loan product changes, or a prepayment penalty is added. A concession tweak that doesn’t move the APR past the threshold won’t restart the clock.7Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions
Concessions are most useful when a buyer can afford the monthly payment but is short on the cash needed at closing. Know your cap, get a realistic closing cost estimate from your lender, and ask for what you’ll actually use.