Seller concessions are at near-record highs in today’s buyer’s market, so there’s a good chance you can negotiate some credits or other help from your lender if you’re buying a home.
Just be aware that all major loan programs limit concessions to a small share of the purchase price. It’s important to know the limits because if you ask for a higher amount, your lender will reduce your concessions at closing, and you’ll get less than you expected.
Becoming familiar with the seller concession limits for your loan program before talking with the seller puts you in a stronger negotiating position.
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Conventional loan seller concession limits
If you’re buying a primary home or a second home with a conventional loan, the cap on concessions depends on the size of your down payment. You’re allowed to receive concessions up to 3% if your down payment is under 10%, up to 6% if your down payment is between 10% and 24.99%, and up to 9% if your down payment is 25% or greater.
For example, if you buy a home for $450,000 and make a 5% down payment, your maximum concessions are $13,500. If you put 20% down, you can get up to $27,000 in concessions.
Concessions are calculated as a percentage of the purchase price or the appraised value, whichever is lower. You can use concessions to cover closing costs, prepaid expenses, and up to 12 months of homeowners association fees. You can’t use concessions for your down payment or to expand your cash reserves, and you can’t apply them toward your minimum borrower contribution.
FHA loan seller concession limits
Unlike conventional loans, FHA loans don’t limit concessions by down payment size. The maximum seller concessions are 6% of the purchase price or the appraised value, whichever is lower. That’s true even if you’re making the minimum possible down payment of 3.5%.
“If you are really needing that additional assistance because you don’t have a ton of money saved, it may be in your best interest to go in on an FHA loan,” says Ashley Harris, director of homebuyer education at Neighbors Bank.
You can use seller concessions on an FHA loan to cover closing costs, prepaid expenses, and discount points. You can also use concessions to pay the upfront Mortgage Insurance Premium (MIP). If you’re using concessions to pay the upfront MIP, you must pay the full amount in cash at closing; you can’t split the premium between upfront and financed payments.
Seller concessions can’t pay any part of your down payment, and they can’t be used for moving expenses, paying off debts, or repairs that aren’t mandated by the FHA.
VA loan seller concession limits
VA loans don’t place any limit on seller-paid closing costs, but limit other seller concessions to 4% of the property’s appraised value.
Standard closing costs that the seller can pay without limits include the VA appraisal fee, discount points and rate buydowns, the loan origination fee, taxes, title insurance, and recording fees. Paying off debts or paying the VA funding fee are considered concessions and are subject to the 4% cap.
USDA loan seller concession limits
Seller concessions on a USDA loan can’t go over 6% of the purchase price and must be used for eligible closing costs, not extra incentives like paying off debts. The 6% limit doesn’t apply to money the seller deposits in an escrow account to pay for repairs.
One rule that applies to every loan type
Seller concessions typically can’t go over the allowable closing costs on your loan, regardless of the loan program. That means if you negotiate generous concessions and then find out that closing costs will be lower than you expected, you may need to give up some of the concessions the seller agreed to.
“We see that happen often. You get an estimate from your lender typically on closing costs, but a lot of those items are outside of their control and are items that you can shop for. So they can put in a great estimate for homeowners insurance, but you might get it for a lot cheaper. And now all of a sudden, rather than needing 5% towards closing costs, you only need 4%, but you negotiated 5%. Well, that money is not money that you can just take home with you,” Harris says.
You may have a couple of other options, though. Suppose you’re buying a house for $400,000 and you negotiated $20,000 in concessions, only to find out your closing costs are just $16,000. You could use the remaining $4,000 to buy down your rate, bringing your closing costs up to $20,000, because rate buydowns are generally an eligible closing expense. Alternatively, you could negotiate with the seller to reduce the sale price to $396,000, saving $4,000 on the purchase.
How to make the most of your concession limit
To use seller concessions to your full advantage, take stock of your closing budget and see where you’d benefit the most from the seller’s contribution.
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Talk to your lender to confirm the concession limit for your loan type. Find out which items are eligible to be covered by concessions, and review your closing costs estimate.
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Consider whether you have enough cash saved up to bring to the closing table for homeowners insurance, fees, and more. If not, it likely makes sense to use a seller credit to reduce these upfront expenses.
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Explore discount points and temporary rate buydown options to see what they cost and how they would affect your monthly payment. You may want to use some of your negotiated concessions to make your mortgage payment more affordable, either in the short or long term.
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If your loan program allows seller concessions to go toward repair allowances or paying off debts, think about whether these uses would add breathing room to your budget as you move into your new home.
Seller concession limits FAQs
How much in seller concessions can I ask for on a conventional loan?
You can ask for 3% of the purchase price if you’re putting less than 10% down, 6% if you’re putting 10% through 24.99% down, and 9% if you’re putting 25% or more down. That’s assuming that the property will be your primary residence or second home, not an investment property.
Can seller concessions exceed my closing costs?
Seller concessions generally can’t exceed the allowable closing costs on your loan. In addition, concessions must stay within limits set by each loan program.
Do seller concession limits change based on the purchase price?
Loan programs set seller concession limits as percentages of the purchase price, so the limits change if the purchase price changes. For example, if you buy a $400,000 home with a conventional loan and a 5% down payment, seller concessions are limited to 3% of the purchase price, or $12,000. If the purchase price changes to $300,000 and you’re still making a 5% down payment, then seller concessions can’t be higher than $9,000.
Can I get seller concessions on an investment property?
If you buy an investment property with a conventional loan, you can get seller concessions of up to 2% of the lesser of the purchase price or the appraised value. Portfolio lenders set their own rules and may allow concessions on investment properties of up to 6% in some cases.
What happens if the home appraises below the purchase price?
If the home appraises below the purchase price, the maximum possible seller concessions will typically go down. Most loan programs tie seller concession limits to the lesser of appraised value and purchase price, or to appraised value. And in the case of USDA loans, where the limit is based on the purchase price, an appraisal gap will often lead to renegotiating the purchase price, thereby reducing the maximum seller concessions.
