The buyer has asked you to pay some of their closing costs instead of dropping the price. It sounds like the same money leaving your pocket either way, and in cash terms it frequently is. It is not the same transaction, there are caps on it that are not negotiable, and which of the two you agree to changes what your house sells for on the record.
This article covers what a concession actually is, the limits by loan type, why a buyer prefers one to a price cut, when a seller should prefer the opposite, and the trap at the appraisal.
We buy houses, so read the last section knowing that. We are not lenders. The caps below come from the loan programmes and they are applied by the buyer's lender to the specific transaction, so confirm the figure with that lender before agreeing anything. Programme guidance is revised.
What a concession is
A seller concession, which lenders call an interested party contribution, is money you agree to put toward the buyer's costs at closing rather than toward reducing the price.
It can cover things that are normally the buyer's: closing costs, prepaid items such as taxes and insurance, discount points to reduce their interest rate, and in some programmes a temporary rate buydown.
What it cannot do is fund the buyer's deposit. Contributions cannot be used for the down payment, for reserves, or for the borrower's minimum required contribution.
That single rule catches people who imagine a concession can get a buyer over the line who has no money at all. It cannot. It reduces what they need at the table for costs, not what they need for the purchase.
The caps, by loan type
These are set by the loan programme, not by your contract, and exceeding them does not simply get ignored.
Conventional, on a primary residence, tiered by the buyer's down payment: up to 3 per cent where they put down less than 10 per cent, up to 6 per cent between 10 and 25 per cent, and up to 9 per cent at 25 per cent or more. On an investment property it is 2 per cent whatever the down payment.
FHA: up to 6 per cent. Contributions above that are treated as an inducement to purchase and reduce the mortgage amount.
VA: up to 4 per cent in concessions, and that sits on top of customary closing costs, which are treated separately.
USDA: up to 6 per cent.
Two mechanics worth knowing. The percentage is applied to the lesser of the sale price or the appraised value, which matters when an appraisal comes in low. And where concessions exceed the cap, the lender reduces the loan amount by the overage rather than everybody carrying on regardless.
One current point that surprises people: Fannie Mae has clarified that customary seller payments to the buyer's agent do not count toward the contribution maximums. That is worth knowing in any conversation about who pays what.
Why a buyer asks for this rather than a price cut
Understanding their reason tells you what you are actually negotiating over.
They are short of cash, not short of income. A buyer with a mortgage approval and a thin savings balance is helped far more by 8,000 dollars at the table than by 8,000 dollars off a price they are borrowing anyway.
A price cut barely moves their payment. Eight thousand off a loan changes a monthly figure by a small amount. Eight thousand toward a rate buydown changes it considerably more, which is why buydowns have become common.
It preserves the appraisal. Both sides frequently want the recorded sale price to hold.
Concessions, credits and repairs are three different things
These get used interchangeably in conversation and they behave differently, which matters once a lender is looking at the file.
A closing cost concession is the thing this article is about: money toward the buyer's costs and prepaids, capped by programme.
A repair credit is a contribution offered because something was found at inspection. Lenders treat these more carefully, because a credit for a repair that the property needs to be safe or habitable is a different proposition from help with costs. Some are disallowed outright, and the lender may instead require the repair to be done.
A repair escrow holds money back at closing to pay for work not yet done. Our article on what a lender means by a repair escrow covers when one is available and the deadline question to settle in writing first.
The practical consequence for a seller: agreeing "we will give them four thousand" without saying which of the three it is is how a deal reaches underwriting and stalls. Name the mechanism in the contract, and have the buyer's lender confirm it works before anybody signs.
When a seller should prefer the price cut
Now your side, which is a genuinely different calculation.
A price reduction is simpler and it ends. No cap, no lender approval of the figure, no risk of the concession being disallowed late.
A concession can be capped below what you agreed. If you agree 7 per cent with an FHA buyer, the excess is not simply lost paperwork, it reduces their mortgage and the deal changes shape at the worst moment.
Your net can differ. Run both versions properly rather than assuming they are the same money. Our net proceeds calculator lets you compare them, and our page on closing costs when selling in Oklahoma covers the other lines.
The higher recorded price has a life after you. A sale at full price with a concession is a comparable at full price. That helps the neighbourhood and, if you own anything else nearby, it helps you. It is a small point and it is real.
The trap at the appraisal
This is where concessions go wrong, and it is worth reading twice.
The cap is applied to the lesser of the sale price or the appraised value. So if the property appraises below the contract price, the cap shrinks with it, and a concession that was inside the limit when you agreed it can fall outside afterwards.
You are then renegotiating two things at once, the gap and the concession, at the point in the transaction when everybody has least patience. Our article on when the appraisal and the inspection disagree covers the appraisal side, and our article on why appraisals come in low covers the causes.
The defence is simple: ask the buyer's lender to confirm the maximum before it goes in the contract, and leave margin.
Where we come in
If a concession closes an otherwise good sale, agree it. A financed buyer at full price who needs help with costs is a better outcome than almost anything else on this site, and the mechanism exists precisely for that. Check the cap, put it in the contract, and get on with it.
Where we become relevant is where concessions are being used to hold together a buyer who cannot really afford the purchase. A deal that needs the maximum contribution, a rate buydown and a repair credit is a deal with very little margin in it, and those are the ones that fail late. Our article on when a sale falls through covers what that costs you in time.
We do not use concessions, because there is no lender and no closing costs of the buyer's to contribute to. The number we give is the number. Our page comparing a cash offer against listing has the arithmetic, and on a sound house it usually favours the listing.
The short version
- A concession is money toward the buyer's closing costs, prepaids, points or a buydown, rather than a reduction in price
- It cannot fund their down payment, reserves or minimum contribution
- Conventional caps on a primary residence: 3 per cent under 10 per cent down, 6 per cent from 10 to 25, 9 per cent at 25 or more. Investment property 2 per cent
- FHA 6 per cent, VA 4 per cent on top of customary costs, USDA 6 per cent
- The cap applies to the lesser of sale price or appraised value, and exceeding it reduces the buyer's loan
- Fannie Mae has clarified that customary seller payments to the buyer's agent do not count toward the maximums
- Buyers prefer concessions because they are short of cash, not price
- Confirm the maximum with the buyer's lender before it goes in the contract, and leave margin for a low appraisal
Frequently asked questions
What is a seller concession?
Money you agree to put toward the buyer's costs at closing rather than toward reducing the price. Lenders call it an interested party contribution.
What can it pay for?
Costs that are normally the buyer's: closing costs, prepaid items such as taxes and insurance, discount points, and in some programmes a temporary rate buydown.
Can it pay their deposit?
No. Contributions cannot be used for the down payment, for reserves, or for the borrower's minimum required contribution. That rule catches a lot of people.
What is the conventional limit?
On a primary residence it is tiered by the buyer's down payment: up to 3 per cent under 10 per cent down, up to 6 per cent between 10 and 25, and up to 9 per cent at 25 or more.
What about an investment property?
2 per cent, whatever the down payment.
What is the FHA limit?
Up to 6 per cent. Contributions above that are treated as an inducement to purchase and reduce the mortgage amount.
What is the VA limit?
Up to 4 per cent in concessions, which sits on top of customary closing costs. Those are treated separately.
What is the USDA limit?
Up to 6 per cent.
What is the percentage applied to?
The lesser of the sale price or the appraised value, which is why a low appraisal can shrink the cap after you have already agreed a figure.
What happens if we exceed the cap?
The lender reduces the loan amount by the overage. It is not simply ignored, and the deal changes shape at a bad moment.
Does the seller paying the buyer's agent count toward the cap?
Fannie Mae has clarified that customary seller payments to the buyer's agent do not count toward the contribution maximums.
Why does a buyer want this instead of a lower price?
Usually because they are short of cash rather than short of income. Money at the table helps them more than the same money off a price they are borrowing anyway.
Does a price cut not help their payment?
Barely. The same sum put toward a rate buydown moves a monthly payment considerably more, which is why buydowns have become common.
When should I prefer a price reduction?
When you want simplicity. No cap, no lender approving the figure, and no risk of the concession being disallowed late in the transaction.
Is the net the same either way?
Not necessarily. Run both versions properly rather than assuming. Our net proceeds calculator lets you compare them.
Does the recorded price matter?
A sale at full price with a concession is a comparable at full price, which helps the neighbourhood and helps you if you own anything else nearby. Small, and real.
What is the appraisal trap?
The cap applies to the lesser of price or appraised value. If the property appraises low, the cap shrinks and a concession that was inside the limit can fall outside it.
How do I avoid that?
Ask the buyer's lender to confirm the maximum before it goes in the contract, and leave margin.
Is a concession a sign of a weak buyer?
Not by itself. A deal needing the maximum contribution plus a buydown plus a repair credit has very little margin in it, and those are the ones that fail late.
Do cash buyers offer concessions?
No. There is no lender and no buyer closing costs to contribute to, so the number offered is the number.
Should I agree to one?
If it closes an otherwise good sale, yes. A financed buyer at full price who needs help with costs is a better outcome than almost anything else on this site.
What is the first thing to do?
Ask the buyer's lender what the maximum is for this specific transaction, in writing, before anybody agrees a figure.
We buy houses, so read the last section knowing that. We are not lenders. The caps here come from the loan programmes and are applied by the buyer's lender to the specific transaction, so confirm the figure with that lender before agreeing anything. Programme guidance is revised.