A seller concession is one of the most useful tools in a contract and one of the most misunderstood. Used well, it lowers a buyer’s cash to close without changing the price by much. Let me explain what it is, the limits that apply, and what it can and cannot pay for.
Written by Anthony I. Shin, Esq., Principal and real estate attorney at Prime Title & Escrow
A seller concession, sometimes called a seller credit or an interested party contribution, is the seller agreeing to pay part of the buyer’s costs at closing. It is negotiated in the contract, it shows on the settlement statement, and it is bounded by rules that depend on the buyer’s loan. Here is how it works.
A seller concession pays eligible buyer costs such as closing costs and prepaid items, which lowers the buyer’s cash to close. It cannot pay the buyer’s down payment, and it cannot exceed the buyer’s actual costs. The maximum allowed depends on the loan program and, for conventional loans, the size of the down payment.
The limits by loan type
Each loan program sets its own ceiling, so the first step is knowing the buyer’s loan. On a conventional loan, the cap is 3 percent of the price with less than 10 percent down, 6 percent with 10 to 25 percent down, and 9 percent with more than 25 percent down, and 2 percent on an investment property, under Fannie Mae and Freddie Mac rules. An FHA loan allows up to 6 percent. A loan backed by the Department of Veterans Affairs caps defined concessions at 4 percent, while normal and customary closing costs are treated separately and are not counted in that 4 percent. Because the details depend on your exact loan, confirm your limit with your lender before writing it into the contract.
What a concession can pay for
Within the limit, a concession can go toward the buyer’s eligible closing costs and prepaid items: the lender’s fees, the title and settlement charges, the recordation taxes, discount points to buy down the rate, and prepaid taxes and insurance. It is the buyer’s costs that get covered, which is exactly why it reduces the buyer’s cash to close.
What a concession cannot do
A concession cannot pay the buyer’s down payment, cannot fund reserves or the borrower’s minimum required contribution, and cannot exceed the buyer’s actual costs. If a credit is larger than the costs it is meant to cover, the excess is not paid out as cash to the buyer. These limits exist to keep the loan tied to the real value of the home.
A concession is figured on the lesser of the sale price or the appraised value. If a buyer and seller raise the price to fund a larger credit and the appraisal does not support the higher number, the allowed concession drops and the deal can stall. The cleanest approach is to keep the price honest and the concession within the limit. I make sure the contract language and the settlement statement line up so this does not become a problem late.
A note on agent commissions
After the 2024 National Association of Realtors settlement changed how buyer agents are paid, a common question is whether a seller paying the buyer’s agent counts against the concession cap. For conventional loans, Fannie Mae clarified that customary seller payments toward the buyer’s agent commission do not count against the contribution limits, provided they are reasonable and stated in the contract. As always, confirm the treatment with your lender for your specific loan.
How it shows up at closing
A concession is written into the contract and then appears as a credit to the buyer on the settlement statement, reducing the buyer’s cash to close and reducing the seller’s net proceeds by the same amount. For the full set of costs it can offset, see my overview of closing costs in Virginia and the line by line split in who pays closing costs in Virginia.
Concessions come up on residential purchases across Virginia and West Virginia. They are a negotiation tool with clear rules, and the surest way to use one well is to confirm the buyer’s loan limit, keep the price honest, and put the terms in the contract. I am glad to make sure the settlement statement reflects exactly what was agreed.
Send me your contract and loan type and I will confirm the limit and make sure the credit is handled correctly at closing.
Get Your Free Quoteor call (703) 552-4155Frequently asked questions
What is a seller concession in Virginia?
A seller concession is the seller agreeing to pay some of the buyer’s closing costs or prepaid items at settlement. It lowers the buyer’s cash to close. It is negotiated in the contract and limited by the buyer’s loan program, and it cannot cover the buyer’s down payment.
How much can a seller contribute to closing costs?
It depends on the loan. Conventional loans cap interested party contributions at 3 percent of the price with less than 10 percent down, 6 percent with 10 to 25 percent down, and 9 percent above that, and 2 percent on investment property. FHA allows up to 6 percent, and loans backed by the Department of Veterans Affairs cap concessions at 4 percent with normal closing costs treated separately. Confirm your limit with your lender.
Can a seller concession pay my down payment?
No. Under conventional, FHA, and Department of Veterans Affairs rules, a concession can pay eligible closing costs and prepaid items but cannot be used for the down payment, reserves, or the borrower’s minimum required contribution. You still need your own funds for the down payment.
Does the seller paying the buyer’s agent count toward the concession limit?
Generally no. After the 2024 National Association of Realtors settlement, Fannie Mae clarified that customary seller payments toward the buyer’s agent commission do not count against the conventional contribution caps, as long as they are reasonable and stated in the contract.
What happens if a seller concession is too large?
A concession above the allowed limit is treated as an inducement to purchase and reduces the value used to calculate the loan, dollar for dollar over the cap. A concession can also not exceed the buyer’s actual costs, so any excess cannot be paid out as cash.
This article is general information about seller concessions for buyers and sellers in Virginia and West Virginia. It is not legal or financial advice for your specific transaction, and program limits can change. Please confirm the limits and treatment for your loan with your lender, and confirm the closing details with me directly.