What Is the Max Seller Contribution on a Conventional Loan?

When purchasing a home, buyers encounter various costs beyond the sales price. Seller contributions are funds or credits a home seller provides towards a buyer’s expenses, typically at closing. This arrangement helps alleviate the financial burden on the buyer by covering certain upfront costs associated with the transaction.

Defining Seller Contributions

Seller contributions are financial assistance to offset a buyer’s closing costs and other related expenses. They generally cover fees buyers would otherwise pay at closing. Common examples include loan origination fees, appraisal fees, title insurance premiums, attorney fees, and recording fees. Sellers may also contribute towards discount points, which reduce a buyer’s mortgage interest rate.

Sellers often offer these contributions to make their property more attractive, particularly in market conditions where inventory is high or buyer demand is lower. This can incentivize a sale, meet a buyer’s financial needs, or simply facilitate a smoother and quicker transaction. While beneficial for buyers, these concessions are negotiable and are formalized within the purchase agreement.

Conventional Loan Seller Contribution Limits

For conventional loans, which adhere to guidelines set by government-sponsored enterprises like Fannie Mae and Freddie Mac, specific limits govern the maximum amount a seller can contribute. These limits are directly tied to the buyer’s down payment percentage or the loan-to-value (LTV) ratio. For buyers making a down payment of less than 10% of the home’s sales price, the maximum seller contribution is capped at 3%.

When a buyer’s down payment is between 10% and 25%, sellers can contribute up to 6% of the sales price. For those making a substantial down payment exceeding 25%, the allowable seller contribution increases to a maximum of 9%. These percentages apply to primary residences and second homes. For investment properties, the seller contribution limit is significantly lower, typically set at 2% regardless of the down payment amount.

These percentages represent the absolute maximums permitted by conventional loan guidelines. A seller is not obligated to offer any contributions, and the actual amount is determined through negotiation between the buyer and seller. The agreed-upon amount must also not exceed the total legitimate closing costs incurred by the buyer.

Calculating Allowable Contributions

The maximum dollar amount for seller contributions is determined by applying the applicable percentage limit to the lesser of the home’s sales price or its appraised value. This “lesser of” rule is a safeguard designed to prevent artificial inflation of the sales price to accommodate larger seller concessions. For instance, if a home is listed at $300,000 but appraises for $290,000, the maximum contribution would be calculated based on the $290,000 appraised value.

Consider a scenario where a buyer is purchasing a home for $400,000 with a 15% down payment, allowing for a 6% seller contribution limit. The home appraises at $400,000. In this case, the maximum allowable contribution would be $24,000 ($400,000 x 0.06). If the same home appraised for $390,000, the calculation would instead be based on the appraised value, resulting in a maximum contribution of $23,400 ($390,000 x 0.06).

Items Not Covered by Seller Contributions

While seller contributions can significantly reduce a buyer’s upfront costs, they cannot be used for all expenses associated with a home purchase. Crucially, these funds cannot be applied towards the buyer’s down payment. This restriction helps ensure the buyer maintains a genuine financial stake and equity in the property.

Additionally, seller contributions generally cannot be used for principal reduction on the loan or to provide the buyer with “cash back” at closing. Funds for future property taxes and insurance placed into an escrow account are typically not covered, though initial prepaid amounts for these items at closing may be allowed. These exclusions maintain the integrity of the loan and prevent practices that could artificially inflate the home’s value or provide undue financial benefit to the buyer outside of legitimate closing costs.