What Is the 4% Rule on a VA Loan? Seller-Paid Closing Costs Explained

The 4% rule on a VA loan limits seller concessions to 4% of the home's reasonable value, the value VA sets from the appraisal. Ordinary closing costs the seller agrees to pay are a separate bucket, and VA doesn't cap those, so a seller can pay some or all of your closing costs and still give concessions up to the 4% limit.

I'm Dennis Mark Interdonato with The Dennis Mark Group. The 4% rule changes how I write a VA offer in Monmouth and Ocean County.

What is the 4% rule for VA loans?

Here's how VA.gov puts it: VA lets sellers or builders offer credits to cover some or all of a buyer's closing costs and doesn't limit those credits, but it limits seller's concessions to no more than 4% of the home's reasonable value. You'll find the reasonable value on the VA Notice of Value your lender gives you after the appraisal.

So there are two buckets. Closing costs: no VA cap. Concessions: capped at 4%. And notice what the 4% is measured against: the reasonable value from the appraisal, not the price on the contract. Until the Notice of Value comes back, the exact limit isn't known, which is one more reason to keep any concession request inside a comfortable margin.

What counts as a seller concession on a VA loan?

VA defines a concession as anything of value added to the transaction at no additional cost to the buyer. VA's examples:

• A credit for the VA funding fee
• Paying off the buyer's debt
• Prepaying the buyer's hazard insurance

Say VA sets the reasonable value at $450,000. Four percent of that is $18,000, the most the seller can give in concessions on that deal. Closing-cost credits sit outside that number.

Which closing costs can the seller pay?

VA lists costs that you and the seller can negotiate over:

• Loan origination fee and discount points
• Credit report, and any credit balances or judgments
• VA appraisal fee
• Hazard insurance and real estate taxes
• State and local taxes
• Title insurance and the recording fee
• The fees for your real estate professional, which, like every fee in a deal, are set by agreement

Where one item lands, closing cost or concession, can depend on how it's structured. That call belongs to your lender.

Why do seller credits matter so much on a VA purchase?

Because you can't finance your closing costs. VA says that on a purchase loan, the funding fee is the only cost you can roll into the loan. Everything else gets paid when the loan closes. VA's Buyer's Guide adds that you need enough cash for those costs, plus any difference if the price is higher than the reasonable value.

A buyer with no down payment can still need real money at closing. A seller credit is often what closes that gap.

VA also notes that many lenders charge VA borrowers a 1% flat fee, sometimes called a loan origination fee, and that some lender fees are negotiable. Your Loan Estimate shows all of it. Read it line by line.

How do you ask for a seller credit in a New Jersey offer?

In writing, with a number. Here's how I do it:

1. Get the cost estimate first. Your lender's Loan Estimate tells us roughly what closing will cost before we write anything.
2. Name the amount and what it covers. "Seller to credit buyer $X toward closing costs" is clear. "Seller to help" isn't.
3. Check it against the 4% limit if any part of the credit is a concession, like paying the funding fee.
4. Think about the appraisal. VA says the loan can't be more than the lower of the price or the appraised value. If we raise the price to cover a credit, the appraisal still has to support the higher price.

I tell people what they need to hear, not what they want to hear. Asking for a credit can make an offer weaker when a home has other buyers interested. Sometimes the better offer is the clean one. We'll look at that house by house.

What can a VA buyer pay at closing?

The Buyer's Guide says a VA borrower can pay, at most, reasonable and customary amounts for the fees and charges VA itemizes, plus a 1% flat charge from the lender, plus reasonable discount points. VA also allows the seller, the lender or any other party to pay fees and charges for you. Your lender applies the detailed rules, and they're the person to ask about any single fee.

Frequently Asked Questions

How much can a seller contribute toward closing costs on a VA loan?

VA doesn't cap seller credits for the loan's closing costs. It caps seller concessions, such as paying the funding fee or paying off debt, at 4% of the home's reasonable value.

Can the seller pay my VA funding fee?

Yes. VA counts it as a concession, so it falls under the 4% limit. More on the fee in who pays the VA funding fee.

Can I roll closing costs into a VA loan?

Not on a purchase. VA says only the funding fee can be financed. Other costs are paid at closing, by you, the seller, or another party.

What does $5,000 in seller concessions mean?

It usually means the seller gives $5,000 at closing toward the buyer's costs. On a VA loan, what the money pays for decides whether it counts toward the 4% limit: a credit toward closing costs isn't capped by VA, while a credit for the funding fee is a concession.

Can my family help with closing costs on a VA loan?

VA's Buyer's Guide says VA policy lets sellers, lenders or any other party pay loan fees and charges for you, and that family can pay the funding fee with gift funds. Your lender documents any gift, so tell them early.

This is general information, not legal, tax or lending advice. Your lender confirms which costs count as concessions on your loan.

About the author

Dennis Mark Interdonato is a REALTOR® and Master CDRE® who leads The Dennis Mark Group at Keller Williams Realty Ocean Living in Point Pleasant, NJ, helping buyers and sellers throughout New Jersey make their next move, with Monmouth and Ocean County as home base. See how I handle military and VA home purchases and sales.

Keep reading

• The free Military Home Guide
• What happens on closing day in New Jersey
• Selling your home to a VA buyer
• Selling a home first? Find out what it's worth
• Have a question this didn't answer? Send it to Dennis Mark.