The VA Seller Concession Rule: What It Is, What Counts, and How to Use It Strategically
Quick brief: On VA loans, sellers (or builders) can cover all allowable buyer closing costs and also offer extra “seller concessions” up to 4% of the home’s reasonable (appraised) value. Concessions include items like a seller-paid VA funding fee, temporary buydown escrows, certain prepaids, extra discount points, or paying off buyer debts. Routine closing costs and market-normal discount points are not counted as concessions toward the 4% cap.
Why the Concession Rule Exists
The Department of Veterans Affairs caps seller concessions at 4% of reasonable value to keep deals sustainable. The cap prevents oversized incentives from masking affordability or inflating what a buyer borrows—while still allowing sellers to pay unlimited allowable closing costs per VA rules.
Key Definitions
“Reasonable Value” (Notice of Value, NOV)
The VA appraiser issues a Notice of Value—VA’s opinion of market value. The 4% concession cap is calculated from this value, not from the loan amount.
Closing Cost Credits (No VA Cap)
Sellers or builders may credit some or all of a buyer’s allowable closing costs (title, recording, appraisal, lender origination/allowed fees, certain taxes/insurance collected at closing, etc.). VA does not cap these credits, though lender overlays and local practices may apply.
Seller Concessions (Capped at 4%)
A seller concession is anything of value added to the transaction that the buyer is not paying for and that the seller is not customarily expected to provide. Common examples include:
- Seller-paid VA funding fee
- Prepaid taxes and insurance beyond ordinary closing charges
- Temporary buydown escrows (e.g., 2-1 buydown funds)
- Extra discount points beyond what the market dictates for that rate
- Payoff of buyer debts (credit cards, collections, judgments)
- Non-customary gifts or inducements
Paying the buyer’s routine allowable closing costs and market-normal discount points are not counted as concessions.
The 4% Limit (and the Important Exclusion)
- Rule: Total seller concessions may not exceed 4% of the home’s reasonable value (NOV).
- Exclusion: Do not include allowable closing cost credits or market-normal points in the 4% tally.
Why it matters: You can pair unlimited allowable closing cost credits with concessions up to 4%—a powerful way to structure VA offers compliantly.
Quick Math Examples
Scenario A: NOV = $400,000
Maximum concessions = 4% × $400,000 = $16,000 (plus any VA-allowable closing cost credits, which are not capped by VA).
Scenario B: Market-Normal Points vs. “Extra” Points
If market pricing requires 2 points for a given rate, a seller covering those 2 points is not a concession. If the seller pays 5 points, the “extra” 3 points count toward the 4% cap.
What Doesn’t Count Toward the 4% Cap
- Buyer’s ordinary allowable closing costs (title, recording, appraisal, lender origination/allowed fees, etc.)
- Market-normal discount points required for the chosen rate
What Does Count Toward the 4% Cap
- Seller-paid VA funding fee
- Prepaid taxes and insurance beyond ordinary closing charges
- Temporary buydown escrows (e.g., 2-1 buydown)
- Extra discount points beyond market norms
- Payoff of buyer debts (credit cards, collections, judgments)
- Non-customary gifts or inducements
Common Misconceptions—Cleared Up
“The 4% is based on the loan amount.”
No—VA measures the cap against the reasonable (appraised) value on the NOV.
“VA limits how much the seller can pay for closing costs.”
VA does not cap credits toward allowable closing costs. The 4% cap applies only to concessions. Lenders may set additional limits.
“All discount points are concessions.”
Market-normal points are not concessions; only extra points beyond market norms count toward the 4% cap.
Practical Playbook
For VA Buyers
- Start with closing cost credits (uncapped by VA), then layer concessions (within 4%) for the funding fee, temporary buydown, or selective debt payoff.
- Re-run concession math after the NOV arrives—if appraised value changes, the 4% room changes.
- If not exempt from the funding fee, consider using concessions to cover it (subject to the cap).
For Sellers/Builders
- Advertise closing cost help first, then offer a menu of concessions up to 4% (e.g., 2-1 buydown, funding fee coverage, targeted debt payoff).
- Ask the lender early for an itemized estimate showing what counts as closing costs vs. concessions.
For Both Sides During Negotiation
- Label precisely in the contract. Separate closing cost credits from concessions.
- Check the tally against NOV. Confirm the 4% once the appraisal issues the NOV.
- Document market-normal points. Have the lender support what’s “market-normal” for the rate.
- Account for lender overlays. VA is the baseline; lenders may be stricter.
FAQs
Can the seller pay all my closing costs on a VA purchase?
Potentially yes—VA does not cap allowable closing cost credits. The 4% cap still applies to concessions, and your lender may impose additional limits.
Can the seller pay my VA funding fee?
Yes, but it counts as a concession and is part of the 4% cap.
Do temporary buydowns (like 2-1) count as concessions?
Yes—the escrowed funds for a temporary buydown are concessions and must fit inside the 4% limit.
Are discount points concessions?
Market-normal points are not concessions; extra points beyond market norms are concessions.
Is the 4% based on price, value, or loan amount?
Use the home’s reasonable (appraised) value on the NOV.
Bottom Line
- Unlimited (by VA) allowable closing cost credits + concessions up to 4% of NOV = strong, compliant structure for VA offers.
- Know what counts and what doesn’t so you can maximize help without exceeding the cap.
- Align early with your lender and agent to label items correctly and confirm limits after the NOV.
This article is educational and not legal, tax, or financial advice. Loan eligibility, costs, and structures vary by lender and local practice. Always verify details with your VA-savvy lender and closing team.
Work with Compass Military
PCSing, house-hunting from afar, or timing a sale around HHG/TLE/TLA? We help military families structure VA offers correctly—closing cost credits vs. concessions, buydowns, and funding-fee strategies—so you can move with confidence. Connect with a Compass Military agent to map your options.
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