Discount points and 4% seller concession limit

Yes, the seller can include personal property items like a television, microwave oven, or other appliances as part of the transaction. However, the VA classifies these tangible items as seller concessions. The value of these gifts must be determined and included in the calculation toward the 4% limit. This prevents sellers from offering excessive non-real-estate inducements to convince a veteran to buy a home. If the value of the TV combined with other concessions exceeds 4% of the home’s reasonable value, the concession package must be adjusted.

If the total value of the concessions—such as gifts, debt payoff, prepaid items, and the Funding Fee—exceeds 4% of the property’s established reasonable value, the loan is considered unacceptable for VA guaranty. The VA views excessive concessions as potentially disguising the veteran’s inability to qualify for the loan or artificially inflating the property value. To proceed with the transaction, the concessions would need to be reduced to fall within the 4% cap. Lenders must carefully itemize these contributions to ensure compliance before the loan closes to avoid rejection of the guaranty.

The VA Funding Fee is a mandatory charge for most VA loans, which helps sustain the loan program. Unlike standard closing costs, if the seller agrees to pay the VA Funding Fee on behalf of the veteran, this payment is classified as a seller concession. This means the dollar amount of the fee counts toward the 4% limit. Veterans often finance this fee into their loan amount, so having the seller pay it upfront is a significant financial benefit, reducing the total debt load, but it must fit within the regulatory cap on concessions.

Yes, a seller is permitted to pay off credit card balances, collections, or judgments on behalf of a Veteran borrower. This can be a powerful tool to lower your debt-to-income ratio and help you qualify for the mortgage. However, funds used for this purpose are strictly classified as seller concessions. Therefore, the total amount of debt paid off by the seller, combined with any other concessions like the Funding Fee or gifts, cannot exceed 4% of the property’s reasonable value. This allows veterans to enter the new home with less financial burden while preventing inflated sales prices.

The 4% limit on seller concessions is calculated based on the reasonable value of the property as established by the Notice of Value (NOV), which is the VA’s term for the appraised value. It is not necessarily calculated based on the sales price or the loan amount. This distinction is important if the sales price differs from the appraised value. For example, if a home is purchased for $205,000 but the VA Notice of Value is $200,000, the maximum seller concessions allowed would be $8,000 (4% of the $200,000 reasonable value), regardless of the higher contract price.

While property taxes and hazard insurance are standard requirements for homeownership, the VA considers the seller’s payment of these “allocable prepaid items” to be a concession because they are ongoing expenses of ownership rather than costs of the transaction itself. Typically, a buyer pre-pays these at closing to set up an escrow account. If the seller covers these costs for you, they are effectively paying your future bills. Consequently, any funds the seller provides to cover your prepaid taxes and insurance premiums must be tallied against the 4% concession limit, unlike the payment of title insurance or recording fees.

Yes, the seller can pay your customary closing costs without those payments counting toward the 4% concession limit. The VA explicitly distinguishes between “normal closing costs” and “seller concessions.” Allowable closing costs include items like title examination fees, recording fees, and the lender’s origination fee. Because the VA does not limit the amount a seller can contribute toward these specific standard transaction costs, a seller could theoretically pay thousands of dollars in closing costs on your behalf, and still have the full 4% allowance available to use for true concessions, such as paying off your student loans.

The VA Lender’s Handbook specifically lists several items that must be calculated toward the 4% limit. These include the seller paying the buyer’s VA Funding Fee, the prepayment of the buyer’s property taxes and insurance, and the payoff of credit balances or judgments on behalf of the buyer. Additionally, “extra” discount points (those above market norms) and gifts such as television sets or microwave ovens are included. It is crucial to aggregate these specific amounts to ensure they do not exceed 4% of the property’s reasonable value, as excessive concessions can make a loan ineligible.

The treatment of discount points depends on the prevailing market conditions. Discount points are fees paid to lower the interest rate. If a seller pays discount points that are considered “appropriate to the market”—meaning they align with standard rates—those points are not counted against the 4% concession limit. However, if the seller pays for “extra” points to provide a permanent interest rate buydown that exceeds what is customary for the market, those specific extra points are considered a seller concession. Only the “extra” portion would count toward the 4% cap established by the VA.

For the purposes of VA home loans, a seller concession is defined as anything of value added to the transaction by the builder or seller for which the buyer pays nothing extra, and which the seller is not customarily expected or required to pay. These are essentially financial inducements used to sweeten the deal for the buyer. The VA distinguishes these concessions from standard closing costs. While sellers often pay closing costs, those specific payments are not considered “concessions” under VA rules. Concessions are typically items like paying the buyer’s debts, providing gifts, or paying the VA Funding Fee.