A seller concession in real estate is a credit the seller agrees to give the buyer at closing to cover costs the buyer would otherwise pay in cash. Depending on the loan program, the property’s use, and the size of the down payment, that credit can run anywhere from 2 percent to 9 percent of the sale price. The credit appears as a line item on the closing documents and can only be applied to legitimate transaction expenses. None of it can be handed to the buyer as cash.
What the Credit Can Pay For
Most of a buyer’s closing bill is fair game. Loan origination fees, title insurance premiums, recording fees, attorney review costs, and property taxes owed at closing can all be paid with concession dollars. So can prepaid items like the first homeowner’s insurance premium and escrow deposits.
Concessions are often used to lower the mortgage rate. The credit can fund discount points for a permanent reduction, or pay for a temporary buy-down. In a 2-1 buy-down, the rate drops two percentage points in year one and one point in year two before settling at the full rate in year three, and the seller’s money covers the difference.
A seller can also fold in a home warranty for the first year of ownership. If a home inspection turns up a repair, the seller may offer a closing credit instead of completing the work. Whatever the use, every dollar has to go toward an actual transaction expense. If the credit is larger than the buyer’s eligible costs, the excess stays with the seller. The buyer never pockets the difference.
How Much the Seller Can Contribute
Each loan program sets its own cap, and conventional loans scale the cap to the down payment.
Conventional Loans
Fannie Mae and Freddie Mac tie the limit to how much the buyer is putting down, measured against the lower of the sale price or appraised value:
- Less than 10 percent down: up to 3 percent.
- 10 to 25 percent down: up to 6 percent.
- More than 25 percent down: up to 9 percent.
Anything above the applicable cap is reclassified as a sales concession and subtracted from the property’s value before the lender runs the loan-to-value calculation.1Fannie Mae. Interested Party Contributions (IPCs)
FHA Loans
FHA caps total interested-party contributions at 6 percent of the sale price. That figure includes seller concessions, discount points, and temporary buy-downs together. Go over, and the lender reduces the property’s adjusted value dollar-for-dollar before applying the loan-to-value ratio. The seller’s credit also cannot be used to cover the buyer’s 3.5 percent minimum down payment.2U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower
VA Loans
VA treats closing costs and concessions as two separate buckets. The seller can pay all of the buyer’s standard closing costs with no dollar cap, including origination fees, discount points, title insurance, recording fees, taxes, and the appraisal. On top of that, the seller can provide up to 4 percent of the home’s reasonable value in concessions. The 4 percent bucket specifically covers items like the VA funding fee, payoff of the buyer’s debts, and prepayment of hazard insurance.3Veterans Affairs. VA Funding Fee and Loan Closing Costs
USDA Loans
USDA Rural Development loans allow seller contributions of up to 6 percent of the sale price toward closing costs and prepaid items. Real estate commissions and other customary seller-paid fees do not count against that cap, and neither does the upfront guarantee fee when funded through premium pricing by the lender.4Rural Development – USDA. Loan Purposes and Restrictions
Investment Properties and Second Homes
The rules tighten once the home is not the buyer’s primary residence. On a conventional loan for an investment property, the seller can contribute no more than 2 percent of the lower of the sale price or appraised value, no matter how large the down payment.
Second homes follow the same tiered structure as primary residences under Fannie Mae guidelines, with the 3, 6, and 9 percent brackets depending on loan-to-value. Buyers of second homes usually put more down, so the higher brackets come up more often. FHA, VA, and USDA loans finance primary residences only, so their caps are not available for a second home or a rental.1Fannie Mae. Interested Party Contributions (IPCs)
What a Low Appraisal Does to the Concession
The appraisal sets a ceiling. Lenders calculate loan-to-value on the lower of the sale price or appraised value, and the maximum concession percentage applies to that same lower figure. A $300,000 contract with a $9,000 concession that appraises at $290,000 is now a $290,000 deal for the lender’s purposes, and the concession cap shrinks accordingly.
If the credit ends up larger than the buyer’s eligible closing costs, the leftover does not go to the buyer. It stays with the seller. This rule holds across every loan program and keeps the concession tied to real expenses rather than functioning as a disguised price cut or a cash transfer.2U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower
Putting the Credit in Writing
The concession has to be written into the purchase agreement, either in the main contract or in an addendum. The language should say whether the credit is a fixed dollar amount or a percentage of the sale price and identify the specific costs it will cover. Vague wording slows underwriting, because the lender needs exact figures to confirm the buyer still meets minimum investment requirements.
Lenders file seller-paid credits under Interested Party Contributions and check that the total stays within the program cap and goes only to eligible expenses.1Fannie Mae. Interested Party Contributions (IPCs)
Federal disclosure rules require every seller-paid loan cost and closing cost to appear on page two of the buyer’s Closing Disclosure, even if the seller receives a separate Closing Disclosure. A lender cannot satisfy that requirement by putting seller-paid items only on the seller’s form.5Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs
Tax Effects on Both Sides
Concession dollars show up differently on each party’s tax return. For the seller, amounts paid on behalf of the buyer generally count as selling expenses. Selling expenses reduce the amount realized on the sale, which is what the IRS uses to figure gain or loss. An $8,000 credit effectively trims $8,000 off net proceeds and may lower a taxable capital gain or increase a deductible loss.6Internal Revenue Service. Selling Your Home
For the buyer, concessions generally do not become part of the home’s cost basis, because the buyer did not pay those costs. A lower basis can mean a larger taxable gain later, when the buyer sells. Discount points paid by the seller for the buyer may be deductible as mortgage interest in the year of purchase, but the deduction reduces the buyer’s basis by the same amount. Settlement statements are worth keeping, and a tax professional can confirm how a particular credit is treated.
Buyer-Agent Commissions After the NAR Settlement
The 2024 National Association of Realtors settlement changed how buyer-agent compensation is communicated. Offers of commission to a buyer’s agent can no longer appear on Multiple Listing Service platforms, though sellers can still offer that compensation through other channels. Sellers can continue to advertise buyer concessions, including closing-cost credits, on the MLS itself.7National Association of REALTORS®. What the NAR Settlement Means for Home Buyers and Sellers
For VA loans, the VA has clarified that a seller’s payment of buyer-broker charges does not count as a seller concession against the 4 percent cap. A VA buyer can receive full closing-cost coverage and a broker-fee payment from the seller without the two amounts being combined.8Veterans Benefits Administration – Veterans Affairs. Circular 26-24-14 – Temporary Local Variance for Certain Buyer-Broker Charges Whether FHA and conventional guidelines adopt a similar carve-out may change as lenders and agencies update their policies.