Seller Contributions Guide: Maximums Explained

Closing costs can add thousands of dollars to the price of buying a home. To help move a deal forward, sellers may agree to contribute toward a buyer’s closing costs — but there are limits. Government-backed and conventional loans each cap how much a seller can contribute.

Understanding these seller contribution maximums can help buyers negotiate more effectively and potentially save significant money at closing. Below, we break down how seller concessions work and the limits for VA, FHA, and conventional loans.

An Overview of Seller Contributions

While amounts vary by loan type and situation, loan closing costs can range from 2% to 5% of the loan balance. On a $200,000 loan, this means buyers likely need to pay $4,000 to $10,000 in closing costs – in addition to their down payment. And, buyers often must pay closing costs out of pocket, which can pose a major financial obstacle.

For various reasons, sellers may want to help buyers cover these closing costs. If sellers want to sell a home quickly, offering seller contributions can entice a buyer to close quickly. For example, a seller may need to use the proceeds from a home sale for the down payment on another home. In this situation, he or she may offer seller contributions to encourage the buyer to close as quickly as possible.

However, it’s important to note that sellers do not need to provide contributions. Instead, this remains an entirely negotiable item between sellers and buyers.

Why Seller Contribution Maximums Exist

While sellers can contribute to buyer closing costs, there are limits. That is, for each loan type, there is a maximum seller contribution, typically expressed as a percentage of the purchase price. These maximums exist for two main reasons.

First, sellers in some markets use these contributions as a competitive tool. And in extreme cases, large concessions could entice borrowers to request home mortgages they cannot afford. In other words, significant concessions may disguise a buyer’s inability to qualify for a loan.

Second, excessive concessions can distort property values in an area, making home buying more difficult for everyone. As a result, regulators like Freddie Mac, Fannie Mae, and HUD impose regulations to keep home values sustainable. For example, say you want to buy a home worth $200,000. The owner wants to sell quickly, so they offer a $20,000 contribution towards closing costs and say you can keep anything extra. But, to do this, he changes the home price to $220,000 and bribes the appraiser to declare a $220,000 value (an unfortunately realistic scenario). Accordingly, the following occurs:

• You pay more than the home is worth.
• Comparable homes in the neighborhood will also start selling for $220,000, making buying a home even less affordable for everyone.
• The bank loan does not reflect the actual home value.

If this cycle continues, home values and loan amounts will quickly reach unrealistic levels. And, if a broader economic shock leads to high default levels, banks and mortgage investors take a tremendous hit. Seller contribution maximums exist to prevent such a negative outcome.

Seller Contribution Maximums by Loan Type

VA Loans

The VA distinguishes between total seller contributions and seller concessions. Concessions represent all payments made by sellers above ordinary loan closing costs. While not a comprehensive list, here are some standard seller concessions:

• Payment of the VA Funding fee
  • Keep in mind if you are receiving VA disability compensation, you may be exempt from the VA Funding Fee
• Property tax and insurance prepayments
• Gifts such as appliances (e.g., TVs, microwaves, etc.)
• Payment of extra mortgage points for permanent interest rate buydowns
• Payoff of credit balances or judgments on behalf of the buyer

According to the VA, sellers cannot offer concessions greater than 4% of the home’s appraised value. But there is no limit on seller contributions towards ordinary closing costs. For instance, say a seller offers to pay 3% of the purchase price towards closing costs and 2% towards the VA funding fee. The total seller contribution equals 5%, but it’s allowed because the 3% towards closing costs does not count towards the 4% limit on seller concessions.

FHA Loans

Unlike the VA, the FHA doesn’t differentiate between seller concessions and total contributions. Instead, with FHA loans, sellers can contribute up to 6% of the sales price towards any of the following:

• Closing costs
• Prepaid expenses
• Discount points
• Any other financing concessions

Conventional Loans

Seller contributions for conventional loans are more complicated than for VA or FHA loans. Fannie Mae and Freddie Mac regulate conventional loans, and they set contribution limits depending on A) property type, and B) down payment size:

• Property Type / Down Payment / Seller Contribution Maximum
  • Primary or second home / less than 10% / 3%
  • Primary or second home / 10% – 25% / 6%
  • Primary or second home / 25% or more / 9%
  • Investment property / any amount / 2%

Technically, there is a maximum seller contribution for conventional loans. But, these limits are extremely generous – more than most sellers will contribute – meaning that these maximums rarely factor into a deal.

Using Seller Contributions to Pay the VA Funding Fee

For veterans, active-duty service members, and other eligible borrowers, the VA funding fee increases the cost of a VA loan. Depending on the borrower’s situation, this funding fee ranges from 0.5% to 3.3% of the loan balance.

On a $300,000 loan, a typical VA funding fee of 2.15% is $6,450 above ordinary closing costs. Yes, you can roll this into the loan balance, but that still means you have to pay it over time.

Under the VA system, sellers cannot provide concessions exceeding 4% of the home’s appraised value. Ordinary closing costs do not count toward this ceiling, but paying the buyer’s VA funding fee does. As a result, if you find a particularly motivated seller, you can negotiate for him or her to pay all of your closing costs and your VA funding fee, as the 3.3% maximum VA funding fee does not exceed the VA’s 4% ceiling on seller concessions. If you can find this sort of deal, you could potentially close on a VA loan with zero out-of-pocket expenses, as the seller’s total contributions would cover everything.

Final Thoughts

Regulators impose seller-contribution caps to protect both A) the borrower and B) the broader housing market and economy. But if you understand how these seller maximums work, you can potentially negotiate thousands of dollars in closing-cost savings. And, for VA loan borrowers, recognizing the difference between seller concessions and total seller contributions can save you even more money at closing.