How Do Seller Concessions Work?

Seller concessions are written into the purchase contract as a dollar amount or percentage of the purchase price that the seller agrees to contribute toward the buyer's closing costs and prepaids. The seller does not write the buyer a check. Instead, the credit appears on the closing disclosure: the seller's net proceeds are reduced by the concession amount, and the buyer's required cash at closing is reduced by the same amount. The concession can be requested in the initial offer or negotiated as part of a counteroffer. In a buyer's market, concessions are a standard part of the negotiation. In a competitive seller's market, requesting large concessions can weaken an otherwise competitive offer.

Seller concessions can be applied to: lender fees (origination, underwriting), third-party fees (appraisal, title insurance, escrow), prepaid items (homeowners insurance, property tax reserves, prepaid interest), and temporary or permanent interest rate buydowns. They cannot be used toward the down payment. They cannot result in a cash payment to the buyer. If the concession amount exceeds the actual closing costs on the file, the excess is forfeited, it does not transfer to the buyer in any other form. This is why requesting a concession that matches the actual expected closing costs is more efficient than asking for the maximum allowed.

Conventional loans have the most complex limit structure: 3% when the down payment is less than 10%, 6% when the down payment is between 10% and 25%, and 9% when the down payment is 25% or more. The most common mistake is assuming there is no limit on conventional loans, or assuming the 6% limit always applies. FHA limits concessions to 6% of the purchase price regardless of down payment. VA limits concessions to 4% of the purchase price, but this does not include certain fees the VA separately allows the seller to pay, such as the VA funding fee, which can be paid by the seller with no cap. USDA follows FHA at 6%.

Presenting a concession request as a specific dollar figure tied to closing costs is more effective than simply asking for a percentage. For example, requesting $8,500 toward closing costs is more concrete than requesting 2.5% and gives the seller something specific to evaluate against a price reduction. Sellers who are reluctant to lower their asking price are often more willing to contribute concessions, because the reported sale price remains at the contract figure. A price reduction of $10,000 affects the comparable sales data in the neighborhood. A $10,000 concession does not. For sellers who care about the reported sale price, and many do, concessions are the preferred form of negotiation.