General information, not legal, tax or lending advice

Seller Concessions in Tennessee

A seller concession, often called a seller credit, is money the seller agrees to put toward the buyer's costs at closing. Buyers in Manchester and Coffee County often ask for one to cover closing costs, prepaid items or points, and sellers often ask whether to agree. The answer depends on the price, the buyer's loan and the limits each loan program sets.

This guide explains what the loan programs say about concessions, what counts toward the limits, and how both sides can think about a request. It is general information from public sources, not legal, tax or lending advice. Your purchase contract and the buyer's lender control the details.

What a seller credit really is

The Consumer Financial Protection Bureau (CFPB) says that when you buy a home you generally pay the costs of the transaction, though depending on the contract or state law the seller may end up paying some of them. It also says that when a buyer negotiates a credit toward closing costs, the seller will usually require a higher price to cover it. In that case the buyer is still paying those costs, just through the loan instead of out of pocket.

For a seller, that means a concession is part of the price conversation. An offer at a higher price with a credit and an offer at a lower price with no credit can leave you with about the same money. Compare offers by what you would take home, not by the headline number.

The limits by loan type

Every major loan program caps how much a seller and other interested parties can pay toward the buyer's costs. Interested parties generally include the seller, the builder or developer and the real estate agents.

Conventional (Fannie Mae). Fannie Mae Selling Guide topic B3 4.1 02 limits financing concessions on a home the buyer will live in to 3 percent when the loan is more than 90 percent of the value, 6 percent from 75.01 to 90 percent, and 9 percent at 75 percent or less. On an investment property the limit is 2 percent. The percentages are figured on the lower of the sales price or the appraised value, not the loan amount.
FHA. HUD Handbook 4000.1 says interested parties may contribute up to 6 percent of the sales price toward the buyer's origination fees, other closing costs, prepaid items and discount points. The 6 percent also covers rate buydowns and payment of the upfront mortgage insurance premium.
VA. VA says it does not limit seller credits for a loan's closing costs, but it limits seller concessions to no more than 4 percent of the home's reasonable value, which appears on the VA Notice of Value. VA counts things such as paying the funding fee, paying off the buyer's debts, prepaying the buyer's hazard insurance and taxes, gifts and temporary buydowns as concessions. Its lender training says the seller paying the buyer's usual and customary closing costs and reasonable discount points does not count toward the 4 percent.
USDA. Under 7 CFR 3555.102(h), USDA will not guarantee a loan if the seller or another interested party contributes more than 6 percent of the sales price toward the buyer's financing costs, closing costs, escrow accounts, furniture or other giveaways, unless the agency provides otherwise.

These are program limits, not targets. A lender can apply its own rules too, so the buyer should ask the lender how much credit the loan can use before the offer is written. My guides to conventional loans, FHA loans, VA home loans and USDA home loans cover each program in more detail.

What a credit can and cannot pay for

Closing costs and prepaids. All four programs allow seller help with closing costs. Fannie Mae also allows a seller to pay the buyer's homeowners association assessments for no more than 12 months after closing.
Not the down payment. Fannie Mae does not let interested party contributions make the down payment, meet reserve requirements or meet minimum borrower contribution rules. HUD says interested party contributions may not be used for the FHA buyer's minimum required investment.
Not more than the costs. Fannie Mae says financing concessions must be equal to or less than the buyer's closing costs. HUD treats contributions that exceed the buyer's actual origination fees, closing costs, prepaid items and points as an inducement to purchase. A credit the buyer cannot use may simply go unused, so size it to the real costs on the Loan Estimate.
Not personal property or debts. USDA's handbook says seller contributions cannot pay the buyer's personal debt or include movable items such as furniture, cars, boats or electronics, though household appliances that are typically part of the sale are fine.

When a concession lowers the value used for the loan

Going over the limits has a cost. Fannie Mae says concessions above its maximums, and items such as cash gifts, furniture, decorator allowances and moving costs, are sales concessions that must be deducted from the sales price, and the loan to value ratio is then figured on the reduced number. HUD lists contributions over 6 percent, decorating allowances, repair allowances, moving costs and paying off consumer debt as inducements to purchase that reduce the price dollar for dollar before the loan to value is applied. In plain terms, a credit that breaks the rules can shrink the loan the buyer qualifies for.

Concessions must also be disclosed. Fannie Mae says loans with undisclosed contributions, such as moving expenses or other money given to the buyer outside of closing, are not eligible for sale to it, and its checklist tells lenders to give the appraiser all financing data and contributions. HUD requires the total to be documented on the sales contract and the Closing Disclosure. Every credit belongs in writing in the contract.

Repair credits after the inspection

After an inspection, buyers and sellers often trade a repair for a credit or a price change. Repair money is treated differently by program:

USDA's handbook says funds a seller provides for repairs are not counted in the 6 percent limit, but seller concessions for repairs must be held in an escrow account.
HUD lists repair allowances among the inducements that reduce the price used for an FHA loan.

Because the rules differ, ask the buyer's lender which form works before agreeing to a repair credit. A price reduction, a completed repair or a credit toward closing costs can each land differently. My home inspection guide and contract contingencies guide cover the inspection period, and my closing day guide explains how a late credit shows up at the final walk through.

Temporary rate buydowns

A seller can also pay to lower the buyer's interest rate for the first years of the loan, called a temporary buydown. VA says a temporary buydown provided by the builder or seller is a seller concession that counts toward its 4 percent cap, and the funds must be kept in a separate escrow account. HUD includes interested party payments for permanent and temporary buydowns in its 6 percent limit, and Fannie Mae counts a buydown subsidy from an interested party in its limits too. A buydown does not change the price of the home, so it is worth comparing with a price cut or a closing cost credit.

Tax notes

The IRS covers seller paid points in Publication 936. It says the seller cannot deduct points paid for the buyer as interest, but they are a selling expense that reduces the seller's amount realized. The buyer reduces the basis of the home by the seller paid points and treats them as if the buyer paid them. Publication 523 also tells buyers to reduce their basis by points the seller paid. Ask a tax professional how a concession affects your own return. My capital gains guide explains amount realized and basis.

If you are the seller

Look at your net. A concession comes out of your proceeds at closing, just like your payoff and other costs. My seller closing costs guide lists the rest.
Check it against the loan. Ask what loan the buyer is using. A request above the program limit may not work as written.
Consider the appraisal. If a higher price is written to cover a credit, the home still has to appraise at that price for the buyer's loan. My home appraisal guide explains what happens if it does not.
Compare the options. A credit, a price change, a repair or a buydown can each solve the same problem. We can run the numbers on each one side by side.

If you are the buyer

Get your Loan Estimate early so you know your real closing costs and prepaids.
Ask your lender the most your loan allows from the seller, in dollars, before you write the offer.
Remember that a higher price to cover a credit means a larger loan and a home that must appraise at that price.
Keep every credit in the written contract. My buyer closing costs guide explains what those costs include.

How I help

When I represent a seller, I lay out each offer by what you would take home, including any credit, and check requests against the buyer's loan type. When I represent a buyer, I work with your lender to ask for a credit that fits your loan and your real costs, and I make sure it is written into the contract.

Keep reading:

Fair housing note: I work with every buyer and seller and follow the same steps for everyone.

This guide is general information from public sources, not legal, tax or lending advice. Loan program rules change and lenders can add their own, so confirm the details with the buyer's lender, a tax professional and a Tennessee real estate attorney.

Weighing a request for a seller credit?

I can run the numbers with you before you answer. Call or text me at (615) 497 1658, or request your free home value report below.

Common questions

What are seller concessions?

Money or items of value the seller agrees to provide toward the buyer's costs, most often a credit toward closing costs, prepaid items or points at closing. The CFPB notes the seller will usually want a higher price to cover a credit, so the buyer often pays for it through the loan.

How much can a seller pay toward closing costs on an FHA loan?

HUD Handbook 4000.1 lets the seller and other interested parties contribute up to 6 percent of the sales price toward the buyer's origination fees, other closing costs, prepaid items and discount points. The credit cannot go toward the buyer's minimum required investment.

What is the VA seller concession limit?

VA limits seller concessions to 4 percent of the home's reasonable value. Items such as paying the funding fee, paying off the buyer's debts or prepaying insurance count toward it. VA does not limit seller payment of the loan's normal closing costs.

How much can a seller contribute on a conventional loan?

For a home the buyer will live in, Fannie Mae allows 3 percent when the loan is more than 90 percent of the value, 6 percent from 75.01 to 90 percent and 9 percent at 75 percent or less, based on the lower of the price or appraised value. Investment properties are limited to 2 percent.

Can a seller credit be used for the down payment?

No. Fannie Mae does not allow interested party contributions for the down payment, and HUD does not allow them for the FHA minimum required investment. Credits go toward closing costs and prepaid items.

What happens if a concession is more than the limit?

Fannie Mae and HUD treat the excess as a sales concession or inducement to purchase that is subtracted from the price before the loan to value is figured, which can reduce the loan the buyer qualifies for. Ask the lender before agreeing to any amount.

Matt Sargent is a Tennessee licensed affiliate broker with Keller Williams who helps buyers and sellers in Manchester and Coffee County. Call (615) 497 1658 or send a message.