A seller’s concession in real estate is a credit the seller agrees to pay at closing toward the buyer’s closing costs, reducing the cash the buyer needs to bring to settlement. Depending on the loan program and down payment, that credit can run from 2% up to 9% of the purchase price. It shows up as a line item on the Closing Disclosure and never passes through the buyer’s hands as cash.1Consumer Financial Protection Bureau. Closing Disclosure Explainer For a buyer who qualifies for a mortgage but is thin on savings after the down payment, it can be the difference between closing and walking away.
What a Concession Can and Cannot Pay
The credit applies to specific charges on your Closing Disclosure, the settlement document your lender must deliver at least three business days before closing. Eligible costs include loan origination fees, title insurance, recording fees, and attorney fees for legal review. Prepaid items are also covered: property taxes, homeowners insurance, and the interest that accrues between closing and your first mortgage payment.
One use that often gets overlooked is buying down the interest rate. A concession can fund discount points, where each point costs 1% of the loan amount and permanently lowers your rate. In a high-rate environment this is powerful, because you get a lower monthly payment without spending your own money on points.
What the credit cannot do is equally important. It cannot go toward the down payment, and you cannot pocket any leftover funds. If the concession exceeds your actual closing costs, the excess is treated as a price reduction for underwriting rather than cash back.2Fannie Mae. Interested Party Contributions (IPCs)
How the Money Moves at Closing
No check passes from seller to buyer. The concession appears as a credit on the settlement statement, reducing the seller’s net proceeds and offsetting specific line items on the buyer’s side.3Consumer Financial Protection Bureau. Closing Disclosure The title company or closing agent handles the math and applies the credit directly against the buyer’s itemized costs.
In practice, the parties often raise the contract price to absorb the concession. If a home is listed at $300,000 and the buyer wants $9,000 toward closing costs, they might agree to a $309,000 sale price with a $9,000 seller credit baked in. The seller still nets roughly $300,000, and the buyer finances the extra $9,000 through the mortgage. The lender checks the final settlement statement to confirm the credit does not exceed actual closing costs.
Contribution Limits by Loan Program
Every mortgage program caps how much a seller, or any other interested party, can contribute. These caps exist to keep sale prices from being artificially inflated. Going over the cap doesn’t automatically kill a deal, but the excess gets stripped out of the sale price for loan calculations, which can change how much you qualify to borrow.
Conventional Loans
Fannie Mae ties the cap to your loan-to-value ratio, calculated from the lower of the sale price or appraised value:2Fannie Mae. Interested Party Contributions (IPCs)
- Down payment under 10% (LTV above 90%): 3%
- Down payment of 10% to 24.99% (LTV of 75.01% to 90%): 6%
- Down payment of 25% or more (LTV at or below 75%): 9%
- Investment properties at any LTV: 2%
The 2% investment-property cap catches buyers off guard. On a $200,000 rental, the seller can contribute only $4,000, which barely covers origination and title in most markets. Fees the seller pays that are “common and customary” in your local market, like transfer taxes or real estate commissions, do not count against the cap.
FHA Loans
FHA allows interested parties to contribute up to 6% of the sale price toward origination fees, closing costs, prepaid items, and discount points.4U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower The 6% cap also covers rate buydowns and the upfront mortgage insurance premium. Any dollar above 6% is subtracted from the sale price before the lender calculates LTV.5HUD. Seller Concessions and Verification of Sales
VA Loans
VA draws a sharp line that trips up even experienced agents. Normal seller-paid closing costs, like title insurance, appraisal fees, recording fees, and origination charges, have no VA-imposed cap. What VA does cap at 4% of the property’s reasonable value are concessions in a narrower sense: paying the buyer’s VA funding fee, covering prepaid taxes and insurance escrows, funding rate buydowns beyond what is customary, paying off the buyer’s debts, or throwing in extras like appliances.6eCFR. 38 CFR 36.4313 – Charges and Fees A seller can pay $15,000 in normal costs plus up to 4% in concessions on the same deal, so the total VA contribution often exceeds what other programs allow.
USDA Loans
USDA Rural Development caps seller and interested party contributions at 6% of the sale price, and the funds must go toward an eligible loan purpose.7USDA Rural Development. HB-1-3555 Chapter 6 – Loan Purposes The upfront guarantee fee is not counted within that 6% when the lender funds it through premium pricing.
Who Counts as an Interested Party
The caps don’t apply only to the property seller. Fannie Mae defines an interested party as anyone who benefits from the sale closing at the highest possible price: builders, developers, real estate agents, brokers, and their affiliates.2Fannie Mae. Interested Party Contributions (IPCs) If a builder offers $10,000 in closing cost credits on a new build and the seller’s agent rebates another $3,000 of commission, those amounts stack against the same cap. On a primary residence with 5% down, the combined limit is 3% of the purchase price, and $13,000 can blow through it quickly.
Since the 2024 NAR commission settlement, buyers more often negotiate commission credits or closing cost contributions from their own agents. Any agent rebate that is credited toward the transaction counts as an interested party contribution and falls under the same limits.
When the Concession Is Larger Than Your Closing Costs
If a seller agrees to $12,000 but your actual closing costs come to $8,000, you don’t pocket the $4,000 difference. The excess is reclassified as a sales concession, deducted from the sale price, and the lender recalculates LTV using the reduced price or the appraised value, whichever is lower. The same thing happens when the total contribution tops the program cap.
This recalculation can cascade. A lower effective sale price can push LTV into a higher bracket, which in turn lowers the concession cap, and in the worst case shrinks the loan amount you qualify for. Size the concession request to your actual closing costs as closely as you can. Your loan officer can estimate those costs early so you aren’t guessing.
The Appraisal Hurdle
The concession has to be written into the purchase agreement or a signed addendum before closing, stating the exact dollar amount or percentage. The lender reviews it during underwriting to confirm it falls within program limits.
The real risk shows up at appraisal. When the contract price was bumped up to absorb the concession, the home has to appraise at or above that higher number. FHA specifically requires appraisers to identify financing concessions and adjust comparable sales for any concession-driven inflation.5HUD. Seller Concessions and Verification of Sales If the appraisal comes in low, the lender uses the lower value, which forces a renegotiation: the buyer covers the gap out of pocket, the seller cuts the price, or both sides shrink the concession.
This is where deals actually come apart. Pushing for a large concession on a home already priced near the top of its comparables is a bet that the appraisal will cooperate. In a flat or softening market, that bet often loses.
How Concessions Affect Your Taxes
Seller concessions are not taxable income for the buyer. The IRS generally treats them as adjustments to the property’s cost basis rather than earnings. If the seller pays discount points for you, you reduce your home’s cost basis by the amount of those seller-paid points.8Internal Revenue Service. Basis of Assets A lower basis means a larger taxable gain when you eventually sell, though the federal exclusion of $250,000 for single filers and $500,000 for joint filers shields most homeowners from owing anything on a primary residence sale. If you end up paying real estate taxes the seller owed and the seller does not reimburse you, those amounts get added to your basis.9Internal Revenue Service. Selling Your Home
Less Cash Now, More Debt Later
When both parties raise the sale price to offset the concession, you’re financing those closing costs over the life of the mortgage. That is a real cost, and most buyers never run the numbers before asking.
Whether the trade is worth it depends on your situation. If the choice is a concession or draining your emergency fund, financing the costs is almost always smarter; cash reserves protect you from the first-year repair or job disruption that no one plans for. If you have the savings and just want the seller to sweeten the deal, a straight price cut usually serves you better. A lower price shrinks your loan balance, your monthly payment, your total interest, and your property tax assessment in jurisdictions that key off the sale price.
When Sellers Say Yes
Market conditions drive your leverage. In a buyer’s market where homes sit and sellers compete for a shrinking pool of offers, concession requests are routine. In a seller’s market with multiple bids, asking for closing cost help can make your offer less attractive than a clean one at the same price.
Even in a competitive market, concessions are more likely to land on homes that have been listed a long time, properties with known repair issues, and deals where the seller needs to close by a particular date. New construction is another strong opening, since builders often advertise closing cost credits as standard incentives, especially late in a quarter when they’re chasing sales targets. Those builder credits still count against the interested party caps, so run the math with your loan officer before you assume the advertised incentive fits inside your program’s limits.