What Are Seller Concessions and How Do They Work?

Seller concessions are credits a home seller agrees to pay toward the buyer’s closing costs, lowering the cash the buyer needs at the settlement table. Every major mortgage program caps those credits at a set percentage of the price or appraised value, running from 2% on investment properties up to 9% on some conventional loans. What they can cover, how big they can get, and how they ripple into your taxes all depend on the loan type and the property.

How the Credit Actually Moves at Closing

The money never changes hands directly. The settlement agent subtracts the agreed amount from the seller’s proceeds and applies it to specific line items on the buyer’s side of the ledger. The seller walks away with less; the buyer keeps more cash for the down payment, moving costs, or reserves.

Lenders allow this because it keeps deals together. A buyer who qualifies for the loan but is short on closing funds might otherwise walk, and a collapsed sale helps nobody. Lenders still watch the credits closely: the concession is measured against the lesser of the contract price or appraised value, and the program ceilings exist to keep the transaction from being inflated beyond what the property is worth.¹

Mortgage guidelines also draw a sharp line between two kinds of contributions, and confusing them can derail your loan. Financing concessions are contributions toward actual loan transaction costs: closing fees, prepaids like homeowners insurance and property taxes, and up to 12 months of HOA dues after closing. These are the credits most people mean, and these are the ones subject to the caps below. Sales concessions are non-realty extras bundled into the deal: furniture, unattached appliances, moving reimbursements, decorator allowances. Lenders treat them harshly. Any sales concession is deducted dollar-for-dollar from the sale price before the loan-to-value ratio is calculated, which can shrink the loan you qualify for.¹

What the Credit Can Pay For

Financing concessions can go toward most standard closing costs: loan origination fees, the appraisal, title insurance, government recording fees, attorney fees, and prepaid property taxes and homeowners insurance. Buyers can also direct the money toward discount points to lower the mortgage rate.

Repair credits negotiated after inspection count too, and this is where buyers get caught. If you’ve already asked for a 3% credit toward closing costs on a loan that caps you at 3%, there is no room left for a repair credit unless you renegotiate.

There are firm limits on what the credit cannot touch. On FHA loans, concessions cannot be applied to the buyer’s minimum required investment, which is the 3.5% down payment. That money has to come from the buyer’s own funds, approved gift funds, or another approved source, not from the seller.²

One recent wrinkle: after the NAR settlement changes, if a seller pays the buyer’s real estate agent commission in accordance with local custom, Fannie Mae has confirmed that payment is not counted toward the financing concession limits on conventional loans.³

Conventional Loan Caps

Conventional loans backed by Fannie Mae and Freddie Mac tie the cap to your down payment. The more you put down, the more the seller can contribute. Both agencies use the same tiers for primary residences and second homes:¹

Down payment under 10% (LTV above 90%): up to 3% of the lesser of sale price or appraised value.
Down payment of 10% to 24.99% (LTV 75.01%–90%): up to 6%.
Down payment of 25% or more (LTV 75% or below): up to 9%.

On a $350,000 home with 5% down, the 3% cap means the seller can contribute up to $10,500. Move to 10% down and the ceiling doubles to $21,000. The percentage is always run against the lower of contract price or appraised value, so a low appraisal shrinks the available credit even if both parties agreed to a higher number.

FHA Loan Caps

FHA loans allow seller contributions of up to 6% of the sale price, no matter the down payment. That generous ceiling is part of why FHA stays popular with first-time buyers who have thin cash reserves.²

The 6% can cover origination fees, closing costs, prepaids, discount points, the upfront mortgage insurance premium, and temporary rate buydowns. Anything over 6% is treated as an inducement to purchase, and the excess is subtracted dollar-for-dollar from the sale price before the lender calculates the maximum mortgage. The buyer’s loan gets smaller if the seller overshoots.²

VA Loan Caps

VA loans handle this differently from every other program, and the distinction catches people off guard. There is no limit on what the seller can pay toward the buyer’s normal closing costs: origination fees, title work, recording charges, and the like. A seller could cover every dime of ordinary closing costs on a VA purchase without hitting any cap.⁴

The 4% limit kicks in on what the VA specifically defines as “seller concessions,” meaning items beyond normal closing costs. Those include paying off the buyer’s debts, covering the VA funding fee, prepaying hazard insurance, and anything else of value added at no cost to the buyer. The 4% cap is measured against the property’s reasonable value as determined by the VA appraisal.⁴

USDA Loan Caps

USDA Rural Development loans cap seller contributions at 6% of the sale price, applied to eligible loan purposes like closing costs and prepaids.⁵ Because USDA requires no down payment, a 6% concession can cover a large share of upfront costs, which makes it one of the lowest out-of-pocket loan programs available in eligible rural areas.

Investment Properties and Second Homes

If you’re buying a rental, expect a tighter cap. Fannie Mae limits seller contributions on investment properties to 2% of the sale price or appraised value, regardless of down payment.¹ Second homes follow the same tiered structure as primary residences (3%, 6%, or 9%), but investment properties get the flat 2%. On a $300,000 rental, that caps the credit at $6,000, often not enough to cover full closing costs. Investors typically plan for the gap by bringing extra cash or negotiating a lower price instead.

What If the Credit Is Larger Than Your Closing Costs

You cannot pocket the difference. Fannie Mae’s rules are explicit: financing concessions must be equal to or less than the total of the borrower’s closing costs. Any excess is reclassified as a sales concession and deducted from the sale price, which triggers a recalculation of your loan-to-value ratio and can reduce your approved loan amount.¹ FHA works the same way: every dollar over the 6% cap is subtracted from the sale price before the LTV is applied.⁶

Work with your lender to estimate your actual closing costs before you ask for a specific credit. Asking for more than you’ll actually owe does not help you; it complicates the file and can delay closing.

How to Ask for a Concession

The request goes into your initial purchase offer as a clause stating the dollar amount or percentage the seller will contribute toward closing costs. Once the seller accepts, that term becomes part of the binding contract. Your agent or attorney handles the exact language.

The appraisal matters. The property has to appraise at or above the purchase price. If the appraisal comes in low, the concession may need to shrink, because the cap is recalculated against the lower value. On a $400,000 contract with a $390,000 appraisal and a 3% conventional cap, the maximum credit drops from $12,000 to $11,700. That can force you to bring extra cash or renegotiate the price.

When Concessions Help, and When They Hurt

In a slow market with rising inventory, concession requests carry real leverage. The seller would often rather give up 3% than watch the listing sit another two months. In a fast-moving market with multiple offers, asking for a credit can weaken your bid: a seller comparing a clean $400,000 offer against a $406,000 offer with a $6,000 credit request will often take the cleaner one, since the net is identical and the credit adds complexity.

There is a middle path experienced agents use: price the concession into the offer. If closing costs run $8,000, offer $408,000 with an $8,000 credit instead of $400,000 with none. The seller’s net is roughly the same and you preserve cash. The home still has to appraise at the higher number, so this works best when comps support it.

Concessions make particular sense in a high-rate environment, where routing the credit into discount points to buy down the rate can save tens of thousands over a 30-year mortgage.

The Tax Side

Concessions create tax consequences that most buyers and sellers overlook until the following April.

For buyers, the key one is discount points. If the seller pays points to buy down your rate, you may be able to deduct those points in the year of purchase, but you have to reduce your home’s cost basis by the same amount. A lower basis means more taxable gain if you later sell for a profit beyond the capital gains exclusion.⁷

For sellers, concessions reduce net proceeds. The IRS calculates gain by subtracting adjusted basis and selling expenses from what you actually realized on the sale. Credits paid on the buyer’s behalf shrink that realized amount and therefore the taxable gain. For homeowners who qualify for the $250,000 (single) or $500,000 (married filing jointly) exclusion on a primary residence, that reduction often does not matter. For sellers with large gains, investment sales, or short holding periods, it can meaningfully trim the tax bill.⁸

1
Fannie Mae. B3-4.1-02, Interested Party Contributions (IPCs)
2
HUD. FHA Single Family Housing Policy Handbook 4000.1
3
Fannie Mae. Selling Notice – Real Estate Commissions and Interested Party Contributions
4
Veterans Affairs. VA Funding Fee and Loan Closing Costs
5
USDA Rural Development. HB-1-3555 Chapter 6 – Loan Purposes
6
HUD. Seller Concessions and Verification of Sales
7
Internal Revenue Service. Publication 551, Basis of Assets
8
Internal Revenue Service. Publication 523 (2025), Selling Your Home