VA Loans: 4% Seller Credits PLUS Closing Costs – What REALTORS® Need to Know
If you are a Real Estate Agent in Kyle, TX, or the greater Austin area, you likely work with a significant number of military families and veterans. In our market, understanding the nuances of the VA Home Loan benefit isn’t just “nice to know”—it is a powerful tool that can save deals, increase your buyer’s purchasing power, and differentiate you as a true veteran advocate.
There is a massive misconception circulating in the real estate industry regarding VA seller contributions. Many agents (and even some inexperienced lenders) believe that the seller is capped at contributing 4% of the purchase price for everything.
This is false.
The truth is far more generous to the Veteran. The Department of Veterans Affairs distinguishes between “Itemized Closing Costs” and “Concessions.” Understanding this distinction can help you structure offers that cover all of your client’s closing costs and potentially pay off consumer debt to help them qualify. At Nest Mortgaging, we believe in empowering our partners with the knowledge to win.
The “4% Rule” Myth vs. Reality
When writing a contract for a VA buyer, you might hesitate to ask for more than 4% in seller contributions because you fear the underwriter will kick it back. However, the VA Handbook (Chapter 8) outlines specific rules that separate standard closing costs from concessions.
Here is the golden rule every Texas Realtor needs to memorize:
“Seller concessions are limited to 4% of the established reasonable value of the property. However, normal discount points and payment of the buyer’s closing costs are NOT considered concessions for the purpose of this calculation.”
Simply put: The 4% cap applies ONLY to “concessions,” not to standard closing costs.
What Counts as “Standard Closing Costs”? (Unlimited)
The seller can pay 100% of the veteran’s customary closing costs without it counting toward the 4% limit. These costs typically include:
- Title Insurance: Owner’s and Lender’s policies.
- Origination Fees: The standard 1% flat fee (if charged).
- Recording Fees: County filing fees.
- Appraisal Fees: The cost of the VA appraisal.
- Credit Report Fees: The cost to pull credit.
- Survey Fees: Property boundary surveys.
- Hazard Insurance & Property Taxes: Prepaid items and escrow setups.
- Discount Points: Reasonable discount points to buy down the interest rate (as long as they are permanent buy-downs).
In a high-interest rate environment, the ability for a seller to pay for a permanent rate buy-down without eating into the concession cap is a game-changer for affordability in VA Loans.
What Counts as “Concessions”? (Capped at 4%)
The 4% limit is reserved for things that are considered “inducements” to purchase. These include:
- Prepayment of Property Taxes and Insurance: While standard prepaids are often grouped with closing costs, large upfront payments can sometimes be categorized here depending on the underwriter’s interpretation, though usually, standard prepaids are excluded from the cap.
- Gifts: Appliances, televisions, or other personal property included in the sale.
- VA Funding Fee: If the seller pays the VA Funding Fee on behalf of the veteran.
- Debt Payoff: Paying off the buyer’s credit card balances, car loans, or judgments.
- Temporary Buydowns: Funds for a 2-1 or 1-0 temporary rate buydown.
The “Debt Payoff” Strategy: A Realtor’s Secret Weapon
This is where expert knowledge of loan options transforms a denial into an approval. Because the 4% concession is in addition to closing costs, you can use seller funds to pay off a buyer’s consumer debt at closing.
Scenario: You have a buyer looking at a home in Kyle, TX. They love the house, but their Debt-to-Income (DTI) ratio is slightly too high because of a $400/month car payment and a $150/month credit card bill.
The Solution: You negotiate a price that allows the seller to credit 4% in concessions. At closing, those funds are sent directly to the creditors to pay off the car and the credit card.
The Result: The veteran’s DTI drops significantly, they qualify for the loan, and they move into their new home with less monthly debt. This is a strategy that FHA and Conventional loans generally do not allow.
Looking at the Numbers: A $400,000 Purchase Example
| Category | Description | Estimated Amount | Counts Toward 4% Cap? |
|---|---|---|---|
| Purchase Price | Sales Price of the Home | $400,000 | N/A |
| Standard Closing Costs | Title, Origination, Recording, Etc. (Approx 2-3%) | $10,000 | NO |
| Discount Points | Buying rate down permanently (e.g., 2 points) | $8,000 | NO (if reasonable) |
| Seller Concessions | Paying off Veteran’s Car Loan & Credit Cards | $16,000 (Max 4%) | YES |
| TOTAL Seller Contribution | Combined Costs Paid by Seller | $34,000 | 8.5% of Sales Price |
*Note: While it is rare to get a seller to agree to 8.5% in contributions in a seller’s market, this table demonstrates the regulatory limit. In a buyer’s market, or with new construction inventory in Kyle and Buda, builders and sellers are often motivated to offer significant incentives. Knowing the limit is higher than 4% prevents you from leaving money on the table.
Why This Matters for Kyle, TX Real Estate
Kyle, Texas, is one of the fastest-growing cities in the nation. With its proximity to Austin and San Antonio, it is a prime location for veterans and active-duty military personnel stationed at nearby bases or retiring in the Hill Country.
As an agent, you may encounter:
- New Construction: Builders in subdivisions like Plum Creek or 6 Creeks often offer massive incentives. If you think the limit is 4%, you might inadvertently cap your client’s benefits. Knowing the rules allows you to stack closing costs and debt payoffs.
- Competitive Offers: In a multiple-offer situation, you usually want to reduce concessions. However, if a property has been sitting on the market, using this strategy can help a veteran buy a home they otherwise couldn’t afford due to DTI constraints.
Why Partner with a Military-Spouse Broker?
Navigating the VA loan landscape requires more than just reading a handbook; it requires passion and experience. I’m Erica Billé, Broker/Owner of Nest Mortgaging. As a former educator, volleyball coach, and proud wife of a US Army Veteran, I understand the unique lifestyle and financial needs of military families.
At Nest Mortgaging, we don’t just process loans; we strategize. We offer:
- Speed: We average a 14-day closing. In a competitive Texas market, speed wins offers.
- Choice: We have access to 60+ lenders, ensuring we find the specific investor that interprets VA guidelines in the most favorable way for your client.
- Local Expertise: Based right here in Kyle, TX, we know the local appraisers, title companies, and market trends.
Whether it is a standard purchase, a VA IRRRL refinance, or a complex scenario involving seller credits, we are your partners in success.
5 FAQs About VA Seller Contributions
1. Can the seller pay the veteran’s down payment?
2. What happens if the seller credits exceed the actual closing costs?
The veteran cannot receive cash back from seller concessions at closing. If the negotiated credit is higher than the actual costs and allowable debt payoffs, the excess money goes back to the seller. We always monitor this closely to ensure we maximize the credit usage (e.g., by buying down the rate further) so no money is left on the table.
3. Do discount points count toward the 4% limit?
Generally, no. As long as the discount points are considered “reasonable” for the market (typically up to 2 discount points), they are classified as closing costs and are exempt from the 4% concession cap. This is critical for helping veterans afford monthly payments in a high-rate environment.
4. Can we use the 4% concession to pay off a judgment or tax lien?
Yes! This is an excellent use of the concession. If a veteran has a judgment or lien that is preventing them from qualifying for the mortgage, the seller can pay this off at closing using the 4% concession allowance.
5. Does the 4% rule apply to FHA or Conventional loans?
No. This is unique to VA loans. FHA loans generally cap seller contributions at 6% of the sales price (for standard LTVs), and Conventional loans cap them at 3%, 6%, or 9% depending on the down payment amount. Neither FHA nor Conventional allows seller credits to pay off the buyer’s consumer debt.
Ready to Close More VA Deals?
Don’t let misconceptions about VA loans limit your clients’ potential. By understanding the distinction between closing costs and concessions, you can structure creative, winning offers that benefit both the buyer and the seller.
If you have a client with a complex scenario, or if you simply want a second opinion on a Loan Estimate, reach out to us. We are here to serve those who served.
Let’s get your Veteran clients into their dream homes.
Start a Loan Application or Quote Today
or call/text Erica Billé at (210) 879-8579
About the Author
Erica Billé is the Broker/Owner of Nest Mortgaging in Kyle, TX. With a background in education and a deep commitment to military families as an Army veteran’s spouse, Erica provides transparent, educational, and personalized mortgage experiences. She specializes in VA Loans, First-Time Home Buyers, and Real Estate Investment strategies.
Compliance & Licensing:
Erica Billé – Nest Mortgaging
NMLS #2117651 | Company NMLS #2377679
Address: 1316 Four Seasons Farm Dr. Kyle, TX 78640
Phone: (210) 879-8579 | Email: erica@nestmortgaging.com
www.nestmortgaging.com
Nest Mortgaging is an Equal Housing Lender. All loans are subject to credit approval and property appraisal. Programs, rates, terms, and conditions are subject to change without notice. This information is for educational purposes and is not a commitment to lend.
