A Guide to FHA Seller Concessions
Rising home prices and higher interest rates have made buying a home more expensive in recent years. Understanding seller concessions and how FHA rules govern them, can help buyers reduce out-of-pocket costs at closing.
Seller concessions are funds or credits a seller agrees to contribute at closing to help cover a buyer's closing costs or certain prepaid items. When you submit a home offer, you can include a request for seller concessions as part of the negotiation. If agreed upon, that credit is applied to eligible closing costs and prepaid items at closing.
In FHA transactions, seller concessions are formally treated as interested party contributions, a category that can include sellers, builders, developers, real estate agents, and other parties with an interest in the transaction. FHA rules set limits on how much these parties can contribute.
Seller concessions can be useful for buyers with limited cash beyond the minimum down payment, as a successful negotiation can reduce the amount of cash the buyer needs to bring to closing.
For FHA loans, interested party contributions are generally capped at 6% of the purchase price. On a $350,000 home, that means the maximum contribution would be $21,000.
It's also important to understand that contributions cannot exceed the borrower's actual allowable closing costs, prepaid items, and other permitted charges, even if the amount is within the 6% cap. Concessions above what the buyer actually owes at closing are not permitted.
Seller concessions can be applied toward allowable closing costs and certain prepaid items, which may include:
Seller concessions cannot be used for:
When structured correctly, seller concessions can help reduce the cash a buyer needs at closing without affecting loan approval. However, problems can arise when concessions are excessive or when the contract structure raises concerns about the transaction's integrity.
Seller concessions can become an issue if they exceed FHA limits or go beyond the borrower's actual allowable closing costs and prepaid items. In some cases, excessive credits or contract terms may be treated as inducements to purchase, which can reduce the property value used for FHA loan calculations and increase the cash the buyer needs to bring to closing.
Buyers should work with their lender and agent to structure concessions properly so they stay within FHA guidelines and reflect legitimate transaction costs.
Seller concession requests are made as part of your purchase offer. In softer market conditions, buyers may have more room to request concessions, while stronger seller markets may leave less negotiating flexibility.
When making a request, be specific about how the funds will be used whether for title fees, lender fees, prepaid insurance, taxes, or other allowable costs. Staying within FHA limits and keeping the request tied to real, documented costs helps avoid complications at closing.
Your real estate agent can be a valuable resource in determining what kind of concession request makes sense for your local market and how to negotiate effectively.
Both FHA and conventional loans allow seller concessions to help cover closing costs and prepaid items, but the limits differ.
For FHA loans, interested party contributions are generally capped at 6% of the purchase price, regardless of the down payment amount.
Conventional loan seller-contribution limits often vary based on down payment size and occupancy type, and may be structured differently than FHA limits. Buyers using conventional financing should confirm current contribution limits with their lender, as they can vary by program and loan scenario.
Seller concessions can be especially useful when:
You're purchasing a home with an FHA loan and have saved enough for a 3.5% down payment, but that's left you with limited reserves. Rather than depleting your savings to cover prepaid items like homeowners insurance or property taxes, you negotiate for the seller to cover those costs through a concession, keeping more cash available after closing.
Your inspection reveals that the air conditioner is near the end of its lifespan. Rather than negotiating a lower purchase price, the seller offers a concession to help offset that cost. Keep in mind, however, that if the FHA appraisal identifies required repairs affecting the property's safety, soundness, or security, those issues may still need to be resolved before closing, a seller credit alone may not satisfy that requirement.
