In real estate, a concession is a benefit one party gives the other to get a deal done without changing the headline price. In a home sale, that usually means the seller agrees to pay some of the buyer’s closing costs or buy down the interest rate. In a lease, it often means a free month of rent or a waived fee. The sticker price stays where it is; the actual cost to the buyer or tenant drops. Concessions appear in resale homes, new construction, apartment leases, and commercial space, and the rules shift depending on the loan type, the property, and who is paying whom.
How Concessions Work in a Home Sale
The most common residential concession is a seller credit toward the buyer’s closing costs. Instead of lowering the purchase price, the seller agrees to pay a set dollar amount at closing that offsets expenses the buyer would otherwise pay out of pocket: loan origination fees, title insurance, prepaid property taxes, recording fees. The credit shows up as a line item on the Closing Disclosure, the final settlement document the buyer receives before the loan funds.1Consumer Financial Protection Bureau. Closing Disclosure Explainer
A seller can also pay for mortgage discount points on the buyer’s behalf. Each point costs 1% of the loan amount and permanently lowers the interest rate, which reduces the monthly payment for the life of the loan.2Consumer Financial Protection Bureau. How Should I Use Lender Credits and Points (Also Called Discount Points)? When rates are high, a seller-paid buydown can keep a buyer in the deal who would otherwise walk.
Not every concession is cash. A seller might agree to complete specific repairs flagged in the inspection, leave appliances or other personal property behind, or buy a one-year home warranty covering major systems. These don’t appear as credits on the settlement statement, but they shift costs the buyer would have faced after closing.
Sellers typically offer concessions when a property has been sitting, when it needs work they’d rather not do themselves, or when they need to close quickly. Keeping the sale price intact and offering a concession instead of a price cut also protects the comparable-sale data in the neighborhood, which matters to the seller’s neighbors and to future refinances.
How Much the Seller Can Pay
Lenders cap seller contributions because unlimited concessions can push a sale price above what the property is worth. The ceiling depends on the loan program, the property type, and the down payment.
Conventional Loans
Fannie Mae ties the maximum seller concession on a conventional loan to the buyer’s loan-to-value ratio and how the property will be used:
- Down payment under 10% (LTV above 90%): capped at 3% of the lesser of sale price or appraised value.
- Down payment of 10% to 24.99%: capped at 6%.
- Down payment of 25% or more: capped at 9%.
- Investment properties: capped at 2% regardless of down payment.
These limits apply to “financing concessions,” meaning closing costs, prepaid expenses, and discount points. Any amount above the applicable cap gets deducted from the sale price before the loan amount is calculated.3Fannie Mae. Interested Party Contributions (IPCs)
FHA Loans
FHA allows seller concessions up to 6% of the sale price, regardless of property type or down payment. That makes FHA more flexible than a low-down-payment conventional loan, where the cap is only 3%.
VA Loans
VA loans split the concept in two. The VA does not limit seller payments toward ordinary closing costs like discount points, prepaid taxes, and recording fees. It does cap seller “concessions” at 4% of the home’s reasonable value, and what counts toward that 4% includes paying off the buyer’s debts, covering the VA funding fee, and prepaying hazard insurance.4U.S. Department of Veterans Affairs. VA Funding Fee and Loan Closing Costs A seller paying $15,000 toward a VA buyer’s closing costs and $8,000 toward debt payoff is fine as long as the $8,000 stays under the 4% ceiling. The closing-cost portion is separate.
USDA Loans
USDA single-family guaranteed loans cap seller contributions at 6% of the sale price, matching FHA.5USDA Rural Development. Loan Purposes and Restrictions
Why Concessions Can Threaten the Appraisal
Concessions complicate the appraisal, and this is where deals often fall apart. The appraiser’s job is to determine market value. When the contract shows the seller contributing $15,000 toward closing on a $400,000 sale, the question is whether the home would have sold for $400,000 without the concession, or whether the buyer accepted a higher price knowing some of it would come back.
If the appraiser concludes the concession inflated the price, the appraised value may land below the contract price. The lender then bases the maximum loan on the lower value, and the buyer must either bring extra cash to closing or renegotiate.
Appraisers also adjust comparable sales for concessions. A comp that sold for $410,000 with a $20,000 concession may be treated as a $390,000 sale for comparison. Heavy use of concessions in a market can quietly drag appraised values down.
Fannie Mae also requires that non-realty concessions, meaning cash gifts, furniture, cars, decorator allowances, and similar items, be treated as “sales concessions” and deducted from the sale price when calculating the loan amount.3Fannie Mae. Interested Party Contributions (IPCs) Those items don’t add value to the property itself, so the lender won’t finance them.
Concession or Price Reduction
Buyers often ask whether to request a $10,000 concession or a $10,000 price cut. The right answer depends on the problem.
A concession keeps the sale price unchanged and reduces the cash you bring to closing. You finance the full original price, so your loan balance and monthly payment are slightly higher. This helps if you’re short on closing funds but comfortable with the payment.
A price reduction lowers the loan amount, the monthly payment, and the total interest paid over the life of the loan. It does nothing for closing costs. You still need the same cash at the table.
Sellers often prefer concessions for a reason that isn’t about them personally. A lower recorded sale price pulls down comps for the whole neighborhood; a concession leaves the comp intact. The economic outcome for the two parties is nearly identical, which is why a concession request can be an easier conversation than a price cut.
Concessions on New Construction
Builders use concessions aggressively, and the packages often dwarf what you see in resale. Common builder incentives include credits toward closing costs, free upgrades on finishes like countertops and flooring, and mortgage rate buydowns that drop the buyer’s interest rate below prevailing market rates.
Rate buydowns have become a particularly popular tool. A builder with an affiliated mortgage company can use part of the home’s margin to buy the rate down by one or two percentage points. For the buyer, that means a lower payment and easier qualification. The trade-off is that these buydowns usually require you to use the builder’s preferred lender, which limits your ability to shop loan terms elsewhere.
Industry analysts have raised concerns that builder buydowns can inflate the effective purchase price. If a builder prices a home at $450,000 and spends $15,000 on the buydown, the buyer finances $450,000 even though the home might have sold for $435,000 without the incentive. If you later sell in a market where builders aren’t offering the same incentive, you could end up underwater. That risk is worth weighing carefully in subdivisions where the builder still controls most of the inventory.
On the other side, builders usually have more margin than individual sellers, which means you can often negotiate concessions even in a strong market. Builders need to move inventory to fund the next phase of construction.
Concessions in Apartment Leases
Landlords use concessions to fill vacancies, because an empty unit is lost revenue. The most common one is a free rent period, typically one month on a twelve-month lease. Landlords may also waive application fees, cover moving costs, reduce the security deposit, or waive parking or pet fees for a set period.
Landlords prefer this to simply lowering the rent because the stated rent affects how the building is valued. Commercial lenders and investors price apartment buildings off rental income, so offering a free month while keeping the gross rent at $3,000 looks better on paper than dropping the rent to $2,750, even when the two cost a tenant almost the same amount.
That’s where net effective rent comes in. It’s the real monthly cost after accounting for free months: multiply the monthly rent by the months you actually pay, then divide by the total lease term. A $3,000 monthly rent with one free month on a twelve-month lease works out to a net effective rent of $2,750. Run this when comparing apartments. A unit advertised at $3,200 with two months free ($2,667 net effective) is actually cheaper than a unit listed at $2,750 with no concession.
One thing tenants routinely miss: the concession almost always disappears at renewal. Your new rent will be based on the gross figure, not the net effective number you got used to. Build that jump into your plan from the start.
Concessions in Commercial Leases
Commercial deals use the same idea on a larger scale. The two most common concessions in office, retail, and industrial leases are tenant improvement allowances and rent abatement.
A tenant improvement allowance is a lump sum the landlord pays toward customizing the space, usually quoted per square foot. It covers permanent improvements like walls, flooring, electrical work, and HVAC changes. It generally doesn’t cover furniture, electronics, or anything the tenant would take at move-out.
Rent abatement is free rent on a longer scale. A tenant on a ten-year office lease might negotiate six to twelve months of free rent up front, giving them time to build out the space and start operating before full rent begins. Landlords are more willing to offer abatement on longer terms because they recover the lost rent over a longer income stream.
Tax Effects
Seller-paid concessions are not taxable income to the buyer, but they can change the property’s tax basis, which matters when you sell. Seller-paid mortgage points reduce your basis in the property. If the seller paid $3,000 in discount points, your basis drops by $3,000. You may still be able to deduct those points in the year of purchase if certain conditions are met, but you have to reduce your basis by the same amount.6Internal Revenue Service. Publication 530 (2025), Tax Information for Homeowners Other seller-paid settlement items work the other way: transfer taxes, title insurance, recording fees, and amounts the seller owed that you agreed to pay are generally added to your basis.7Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
For the seller, concessions paid to the buyer reduce the “amount realized” on the sale, which is the figure used to calculate capital gain. Loan charges that would normally be the buyer’s responsibility, sales commissions, and other costs to sell the home count as selling expenses and are subtracted from the sale price before determining gain or loss.8Internal Revenue Service. Publication 523, Selling Your Home A seller who receives $400,000 but pays $12,000 in buyer concessions reports an amount realized of $388,000. Most sellers won’t owe capital gains tax anyway thanks to the $250,000 exclusion ($500,000 for married couples filing jointly), but on investment properties and highly appreciated homes the math matters.
What’s Not Allowed
Federal law and loan-program rules draw hard lines around certain arrangements, and crossing them can carry criminal penalties.
The Real Estate Settlement Procedures Act prohibits anyone involved in a real estate transaction from paying or receiving referral fees, kickbacks, or anything of value for steering business to a particular settlement service provider. A title company can’t pay a real estate agent a bonus for sending clients its way; a lender can’t pay a builder for requiring buyers to use its mortgage services. The law defines “thing of value” very broadly, covering money, discounts, stock, trips, special banking terms, and services at reduced or free rates.9Consumer Financial Protection Bureau. Prohibition Against Kickbacks and Unearned Fees Violations carry fines up to $10,000 and up to one year in prison, and the person charged for the service can recover three times the improper amount.10Office of the Law Revision Counsel. 12 U.S. Code 2607 – Prohibition Against Kickbacks and Unearned Fees
Fannie Mae also bars certain contributions outright. A seller cannot fund the buyer’s down payment, meet financial reserve requirements, or satisfy minimum borrower contribution requirements through concessions. Undisclosed concessions are prohibited too, including silent second mortgages held by the seller, off-the-books payments to the buyer, and contributions routed through nonprofit down payment assistance programs the seller funds. Mortgages with undisclosed concessions are ineligible for sale to Fannie Mae, which in practice means no mainstream lender will close the loan.3Fannie Mae. Interested Party Contributions (IPCs) The underlying rule is simple: every concession must appear on the closing documents and sit within the applicable limits. Anything structured to hide the true shape of the deal becomes a problem for the lender, the appraiser, and sometimes law enforcement.