Seller Concessions: How Much Can a Seller Pay Toward Closing Costs?

Sellers can cover part of a buyer’s closing costs, but the amount is capped. Every loan type sets its own limit, and for conventional loans the limit depends on the loan-to-value ratio. Going over the cap doesn’t lower the price or add to the credit. The excess simply can’t be used, and the buyer covers that amount in cash. It pays to check the cap for the specific loan program and LTV before an offer goes in, not after a contract is already signed.

Seller concessions are costs the seller pays on the buyer’s behalf. Usually that’s closing costs, prepaid items like tax or insurance escrows, or a rate buydown. Lenders use a broader term for this: interested party contribution, or IPC. It covers contributions from anyone with a stake in the deal closing, not just the seller. That includes builders, agents, and developers.

This matters because the cap applies to the combined total, not the seller’s contribution alone. A builder incentive and a seller concession on the same file count against the same limit, which is easy to miss if the builder incentive isn’t flagged early.

Each loan program sets its own maximum. Conventional loans use an LTV-based concession cap, so the limit shifts with the buyer’s down payment. FHA, VA, and USDA loans use a flat percentage instead.

Fannie Mae and Freddie Mac tie the limit to loan-to-value and occupancy:

• LTV above 90%: 3% of the purchase price
• LTV of 75.01% to 90%: 6% of the purchase price
• LTV of 75% or less: 9% of the purchase price
• Investment properties: 2% of the purchase price, regardless of LTV

Second homes follow the same tiers as primary residences. A buyer putting 20% down lands in the 75.01% to 90% band. That buyer can receive up to 6% in seller-paid costs.

FHA sets a flat 6% cap, regardless of down payment or LTV. That 6% covers closing costs, prepaid escrows, and rate buydowns.

It can’t touch the buyer’s minimum required investment, which is a separate FHA requirement of at least 3.5% of the purchase price. That 3.5% has to come from the buyer’s own funds or an acceptable source like a gift, never from the seller. The two numbers run independently: a seller concession funds closing costs and prepaids, and the buyer’s 3.5% covers the down payment on its own. That’s an easy detail to miss when a concession is being structured into an offer, so it’s worth flagging early.

VA loans work differently, and the difference matters going in. Normal closing costs and discount points aren’t capped at all. The 4% limit applies to a narrower category VA defines specifically as concessions: payoff of the buyer’s debts, the funding fee, and prepaid escrow items beyond what’s customary. Most standard closing costs fall outside that 4% cap. In practice, a seller can often cover a substantial share of a VA buyer’s costs, more than the 4% figure alone suggests.

USDA loans cap seller concessions at 6% of the purchase price, the same as FHA. It applies toward closing costs and prepaid items.

A seller-paid rate buydown draws from the same concession allowance. It doesn’t sit outside it, which is one of the more common misunderstandings on a concession-heavy contract. This applies to both a temporary buydown, which lowers the rate for the first year or two, and a permanent buydown, which lowers it for the life of the loan. If a seller is already covering closing costs near the limit, adding a buydown can push the total over the cap. Check both numbers together before an offer goes in, rather than treating them as separate allowances.

Concession caps exist to stop the sale price from being inflated to disguise a price cut. A seller can always just lower the price instead. But structuring it as a price cut versus a concession changes the loan amount, the down payment math, and the appraisal. Agencies cap concessions so the loan amount reflects the actual value being financed, not a price padded to cover closing costs.

If a contract calls for more in seller concessions than the cap allows, the lender won’t apply the excess. The underwriter doesn’t renegotiate the price or hand the buyer a discount to cover the gap. The amount over the limit doesn’t count as usable funds, and it can’t be paid to the buyer as cash back.

In practice, the buyer leaves that portion of the intended help on the table. If the contract assumed the full concession would cover closing costs, and part of it exceeds the cap, the buyer covers that difference out of pocket at closing.

Agency guidelines also require lenders to subtract any excess above the cap from the value used to calculate the loan-to-value ratio. That’s a backend underwriting adjustment, not a change to the sale price on the contract. It doesn’t lower what the buyer owes or raise what the seller nets. It just means the extra concession never becomes usable funds. Check the math before writing the offer. That’s what keeps a buyer from coming up short on cash to close.

A few scenarios come up often enough to name directly. Seller concessions tend to show up most in a slower market, or on a listing that’s sat for a while, since a seller in that position has more incentive to make the deal work than to hold firm on price. They also come up when a buyer is short on cash to close but otherwise well qualified. Seller paid closing costs free up more of the buyer’s cash for the down payment, which is often the better trade. In a competitive, multiple-offer market, concessions are less common, since sellers with several offers on the table have less reason to add costs on their end.

A concession can also bridge an appraisal gap in the other direction. If a home appraises above the agreed price, a seller with room to spare may prefer covering closing costs over lowering the price outright, since that keeps the comparable sale price on record for the neighborhood unchanged. That’s a scenario worth raising with the listing agent early if it looks likely.

Do seller concessions lower the buyer’s loan amount?

No. A seller concession pays for costs outside the purchase price. It doesn’t reduce the loan amount the way a lower sale price would. That’s part of why the caps exist. Without a limit, a concession could function as an undisclosed price cut while leaving the loan amount and the appraisal untouched.

Can a seller pay for a rate buydown and closing costs at the same time?

Yes, as long as the combined total stays within the cap for the loan program and LTV. The buydown and the closing cost credit draw from the same allowance, not separate ones.

Is a real estate commission a seller concession?

No. Real estate commissions are a standard cost of selling a home. They aren’t counted against IPC limits. The caps apply to costs paid on the buyer’s behalf, not the seller’s own transaction costs.

We run the concession math against the loan program and LTV before an offer goes in. That way a seller credit gets structured at the actual allowable amount, not a number that gets trimmed later at appraisal.

Mike Trejo is the Broker/Owner of Bridgepoint Funding, a residential mortgage brokerage based in Pleasant Hill, California. With more than 20 years of experience in the mortgage industry, Mike has helped thousands of borrowers navigate the home loan process, including many healthcare professionals and travel nurses with non-traditional income profiles.

Mike founded Bridgepoint Funding in 2006 and is consistently ranked among the Top 1% of Mortgage Loan Originators nationwide. Reach out at (925) 478-8630 or visit bpfund.com.