Every loan program lets the seller help the buyer, and every one of them caps it. The cap is on what the programs call interested-party contributions, or on VA loans seller concessions: money from the seller, the builder or the agents toward the buyer's closing costs, prepaid items, discount points and buydowns. Here are the four sets of rules, from each program's own guide.
The limits
| Loan | Seller may pay up to | Measured on |
|---|---|---|
| Conventional, loan over 90% of value | 3% | Lower of price and appraisal |
| Conventional, loan over 75% up to 90% | 6% | Lower of price and appraisal |
| Conventional, loan 75% of value or less | 9% | Lower of price and appraisal |
| Conventional, investment property | 2% | Lower of price and appraisal |
| FHA | 6% | Sales price |
| VA | 4% | Reasonable value (VA appraisal) |
| USDA | 6% | Sales price |
The conventional limits are for a home the buyer will live in or a second home, and they step up as the loan gets smaller against the value: the loan-to-value is the loan as a share of the lower of the price and the appraisal. A lender can be stricter than the program.
Conventional loans
Fannie Mae and Freddie Mac set the same percentages. The seller's money can pay the buyer's closing costs, including prepaid items, and up to twelve months of HOA dues, but never the down payment or the reserves the buyer must show. Anything above the limit, or above the buyer's actual costs, is treated as a sales concession: it comes off the price, and the loan-to-value is figured again.
Fannie Mae counts a buydown's cost toward the limit, and allows temporary buydowns on a home the buyer will live in or a second home, though not on an investment property or a cash-out refinance: up to 3 years, no more than 3 percentage points below the note rate, rising no more than 1 point a year.
FHA loans
The seller and other interested parties may pay up to 6% of the sales price toward the buyer's origination fees, other closing costs, prepaid items and discount points, and HUD's 6% expressly includes payments for permanent and temporary buydowns. The seller paying the commissions it customarily pays is not counted. Anything over 6%, or over the buyer's actual costs, is an inducement to purchase: it comes off the price dollar for dollar before FHA applies its loan-to-value limit. None of the seller's money may count toward the buyer's minimum required investment.
FHA allows a temporary buydown on a fixed-rate purchase loan, not on a refinance or an adjustable-rate loan, and its handbook sets no plan of its own, so ask the lender which buydowns it offers. The buyer qualifies at the note rate.
VA loans
VA's limit is narrower in what it counts. A seller concession, in VA's handbook, is anything of value the seller adds that a seller isn't customarily expected to pay: the buyer's VA funding fee, prepaid taxes and insurance, gifts, paying off the buyer's debts, extra points for a permanent buydown, and escrowed funds for a temporary buydown. Together they may not exceed 4% of the reasonable value, the value on VA's appraisal; above that, in VA's words, they are “excessive, and unacceptable” for a VA-guaranteed loan.
What VA leaves out matters as much: the seller paying the buyer's normal closing costs, and points as appropriate to the market, are not concessions. VA's own example is a market that calls for two points: if the seller pays those two, none of it is a concession; if the seller pays five, three are.
USDA loans
USDA's guaranteed loans allow seller and other interested-party contributions up to 6% of the sales price, for purposes the program allows. A lender's premium-pricing credit, money for repairs and the seller paying the buyer's agent's commission are outside the 6%.
USDA allows a temporary buydown when the seller, the lender or another third party funds it, never the buyer: no more than 2 percentage points below the note rate, rising no more than 1 point a year, fully funded at closing. That rules out a 3-2-1. The buyer qualifies at the full note rate.
A buydown is a concession on every program
However the programs word it, a seller-paid buydown sits inside the limit: FHA names permanent and temporary buydowns in its 6%, VA counts seller-funded buydown escrows and extra points, Fannie Mae counts a buydown's cost, and USDA's handbook lets the seller fund one within its 6%. So when a buyer wants both closing costs and a buydown from the seller, add the two before you agree a number.
A price cut is not a contribution, so no limit applies to it. When the costs a buyer wants covered are larger than the program allows, part of the request can become a lower price instead.
A checklist before you write the offer
- Ask your lender which program you are using and its limit for your loan-to-value
- Get an estimate of your closing costs and prepaid items: a concession above your actual costs is not allowed on any program
- Add any buydown or points to the closing costs before you agree an amount
- On a VA loan, ask the lender which of the seller's payments count toward the 4%
- Write the seller's contribution into the contract as a credit the lender can apply
- If the request is bigger than the limit, ask for the rest as a lower price
How often sellers around Tucson give a concession, and how much, is in Seller Concessions in Tucson, Area by Area. The rate buydown guide has a calculator for what a buydown costs.
