VA Seller Concession Rule

The VA loan allows eligible veterans and service members to buy a home with no down payment and no private mortgage insurance requirement. But no down payment does not mean no closing costs. Buyers are still responsible for loan-related expenses, and those costs can add up. The good news is that sellers can help cover some of these expenses, though the VA limits how much they can contribute. Here is how the 4% VA seller concession rule works.

What Is a Seller Concession?

When you purchase a home, you must pay certain costs during the loan closing process. These costs include expenses separate from the down payment, such as mortgage points, title fees, the VA funding fee, and prepaid taxes or insurance. While closing costs vary by loan type and unique situation, they typically range from 2% to 5% of a loan balance. For a $250,000 loan, this means buyers can face $5,000 to $12,500 in closing costs.

But buyers can also ask for sellers to cover a portion of these closing costs. When sellers pay a portion of these costs, they provide seller concessions to the buyer. For buyers tight on cash, these concessions can make a huge difference in VA loan affordability.

Seller concessions typically come in one of two forms: a percentage of the total closing costs or payment of specific closing-related expenses.

Why Would Sellers Offer Concessions?

Sellers are not required to offer concessions, and they are entirely negotiable. While buyers can request them, sellers can always decline.

In many cases, concessions are offered to help close a deal more quickly or make a home more competitive. Some sellers need to move fast, especially if they plan to use the sale proceeds to purchase another property. In a buyer’s market, where supply exceeds demand, homes may sit longer while sellers continue paying mortgage payments, insurance, utilities, and property taxes. Offering concessions can help attract buyers and secure a sale.

The VA Seller Concession Rule

The VA allows seller concessions. But these concessions cannot exceed 4% of the property’s appraised value as determined by the VA. For instance, concessions on a $250,000 home cannot exceed $10,000 ($250,000 purchase amount x 4% limit).

What Counts Toward the 4% Limit?

The VA doesn’t consider all seller contributions towards this 4% limit. Rather, the VA only categorizes certain contributions made by the seller as concessions. Other contributions, despite being paid by the seller, are exempt from this 4% ceiling. Consequently, VA home buyers may receive more than 4% in total seller contributions.

Broadly speaking, the VA does not consider standard loan closing costs as seller concessions. However, seller payments made in excess of these ordinary closing costs qualify as seller concessions and must not exceed the 4% threshold. As such, buyers need to understand what does and doesn’t qualify as a seller concession. While not comprehensive, the below list includes common seller concessions on VA loans:

• Payment of 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

In other words, sellers can contribute all ordinary loan closing costs on behalf of buyers, regardless of the 4% threshold. But seller concessions related to the above list cannot exceed 4% of the property’s appraised value as determined by the VA.

For example, say the market dictates an interest rate of 5% with two discount points. If the seller paid those two discount points, it would not be considered a seller concession, as they’re ordinary loan closing costs. But if the seller paid an additional two discount points to lower the buyer’s interest rate, those excess points would qualify as a seller concession and go towards the 4% ceiling.

Published VA material attempts to make this distinction as clear as possible: Do not include normal discount points and payment of the buyer’s closing costs in total concessions for determining whether concessions exceed the 4% limit.

Why Does the VA Limit Seller Concessions to 4%?

If a seller wants to provide concessions, why should the VA care? Unfortunately, sellers in some markets use these concessions as a competitive tool. And, in extreme cases, large concessions could entice VA loan borrowers to request home mortgages larger than they can actually afford. In other words, large concessions may disguise a veteran’s inability to qualify for a loan, which is why the Department of Veterans Affairs insists on a 4% ceiling.

VA Seller Concession Example

Assume a VA borrower is buying a $300,000 home with a $300,000 VA loan. Under the 4% rule, seller concessions cannot exceed $12,000, which is 4% of $300,000.

The seller agrees to:

• Pay $9,000 in standard closing costs
• Pay the VA funding fee of $6,450
• Pay off the buyer’s $8,000 credit card balance

The $9,000 in standard closing costs does not count toward the 4% limit.

However, the funding fee and credit card payoff do count. Together, those total $14,450 in seller concessions.

Since the maximum allowed is $12,000, the seller would need to reduce concessions by $2,450 to stay within VA guidelines.

In this scenario, the final breakdown would be:

• $21,000 total seller contributions
• $9,000 in closing costs paid by the seller
• $12,000 in allowable seller concessions

Final Thoughts

Seller concessions can save VA loan borrowers a significant amount of out-of-pocket costs during the closing process. But before accepting large concessions, buyers need to confirm that they comply with the VA seller concession rule. Understanding how these limits work before buying a home can save you a ton of time – and heartache – during the VA loan closing process.