FHA Loan Seller Concessions: A Guide to Getting the Seller to Pay Closing Costs

As an FHA loan officer, one of the most common questions I get from buyers is whether the seller can pay for any of their closing costs. The answer is yes – FHA loans do allow for seller concessions within certain limits.

In this comprehensive guide, we’ll cover how FHA seller concessions work, the benefits, maximum amounts the seller can contribute, how to negotiate concessions, and more. Read on to learn how you may be able to get the seller to cover some of your closing costs when buying a home with an FHA-insured mortgage.

Overview of FHA Loan Seller Concessions

First, let’s make sure we’re all on the same page about what seller concessions are.

Seller concessions refer to the seller agreeing to pay for some or all of the buyer’s closing costs as part of the home purchase contract. The seller isn’t directly handing money to the buyer. Instead the amount they contribute is taken out of the seller’s proceeds at closing and put toward the buyer’s closing costs.

Some common closing costs the seller could cover through FHA seller concessions include:

• Origination fees
• Appraisal fees
• Credit report fees
• Title insurance
• Recording fees
• Transfer and stamps taxes
• Prepaid interest
• Property taxes
• HOA fees

Seller concessions provide a way for the buyer to lower their out-of-pocket expenses at closing. And concessions can also benefit the seller by making the buyer’s offer more attractive, especially in a slow market.

The key is that FHA loans place limits on how much the seller can contribute in concessions. So buyers can’t count on the seller to pay 100% of their total closing costs.

Maximum FHA Seller Concessions Allowed

FHA guidelines dictate that the maximum seller concessions cannot exceed 6% of the sales price of the home

For example, if you are buying a home for $200,000 the seller could contribute up to $12,000 (6% of $200,000) in concessions to cover your closing costs.

The 6% limit applies regardless of the buyer’s down payment amount or other loan details. Seller concessions over 6% are strictly prohibited by FHA regulations.

Additionally, the seller cannot use concessions to fund any portion of the buyer’s down payment, reserves, or pay any recurring or prepaid expenses. The concessions from the seller must go directly toward closing costs.

Benefits of FHA Seller Concessions

FHA seller concessions provide several potential benefits:

• Lower upfront costs – By reducing your closing costs, seller concessions let you buy a home with less cash out-of-pocket at closing. This can be especially helpful for first-time homebuyers.

• Negotiating tactic – Asking for concessions can make your offer stand out and incentivize the seller to accept. This strategy works best in buyer’s markets.

• Affordability – Paying less upfront helps you afford the home. And with an FHA loan, you only need a 3.5% down payment.

• Ease seller burden – In some cases, a seller may want to offer concessions to more easily sell a home that has been on the market for a while.

As you can see, concessions can be a win-win allowing buyers to save on closing costs while also helping motivate sellers to close the deal.

How to Negotiate FHA Seller Concessions

Before you make an offer on an FHA-financed home, here are some tips to negotiate the maximum seller concessions:

• Ask your real estate agent for advice based on your local market conditions. In buyer’s markets, sellers are often more willing to offer closing cost contributions.

• Review your estimated closing costs. Your lender can provide a detailed breakdown so you know how much to request from the seller.

• Note concessions separately in your offer rather than asking for a general price reduction. This makes it clear the seller’s contribution goes to closing costs only.

• Provide comparable sales where sellers paid concessions to support your request.

• Be prepared to compromise, like asking for 3% vs. 6%. Some concessions are better than none.

• Suggest the seller pays recurring costs like HOA fees, taxes, and insurance to cover those expenses for a year.

• Make sure your offer stands on its own merits in case the seller won’t agree to concessions.

With a reasonable concession request backed by supporting data, many sellers are willing to work with you, especially when they need to move the home quickly.

Seller Concessions Example

Let’s look at an example to illustrate how FHA seller concessions can work:

• Purchase price of the home = $240,000
• Max. concessions allowed = 6% of $240,000 = $14,400
• Buyer’s estimated closing costs = $12,000
• Buyer requests seller pays $12,000 toward closing costs

In this case, the seller concession amount fits within the 6% FHA limit. By contributing to the buyer’s closing costs, the seller helps make the sale happen more quickly and easily.

And the buyer saves significantly on upfront costs. On a $240,000 home with 3.5% down, closing costs could otherwise put a strain on the buyer’s savings. The $12,000 concession reduces the buyer’s out-of-pocket expenses.

Using Concessions for Recurring Costs

While seller concessions cannot fund your down payment, reserves or prepaid costs, FHA does allow concessions to be used for recurring expenses.

For example, the seller could cover the first 12 months of hazard insurance premiums or property taxes. This provides an affordability benefit to the buyer by reducing first-year housing costs.

Discuss with your lender if you can use concessions for upcoming tax and insurance payments. This approach maximizes the benefit to you while staying within FHA guidelines.

Alternatives to Seller Concessions

If the seller won’t agree to concessions, or you need additional closing cost assistance, here are some alternatives to consider:

• Negotiate repairs or credits – You may be able to get the seller to cover repairs or offer credits at closing to make the home more affordable.

• Family gift – Receive a gift from a family member to help with your down payment or closing costs. Follow FHA rules on documenting gift funds.

• Lender credits – Get a lender credit by selecting a higher interest rate to lower your upfront costs.

• Down payment assistance – Many state and local programs help first-time buyers with down payment and closing cost grants.

• Mortgage credit certificates – Mortgage credit certificates provide tax credits each year based on your mortgage interest paid.

Talk to your loan officer upfront to discuss options beyond seller concessions that can reduce your total cash needed at closing.

FAQs About FHA Loan Seller Concessions

Here are some quick answers to common questions buyers have about FHA seller concessions:

How are seller concessions paid on FHA loans?

The seller concessions are deducted from the seller’s proceeds at closing and credited toward the buyer’s closing costs in the transaction.

Can seller concessions be used for down payment on an FHA loan?

No, FHA expressly prohibits the seller concessions from being applied to the buyer’s down payment. Concessions can only go toward closing costs.

Are seller concessions taxable to the buyer?

No. Seller concessions are not considered taxable income or capital gains to the buyer.

Can FHA seller concessions exceed 6%?

No. The maximum concessions cannot exceed 6% of the sales price regardless of the loan amount or other factors. More than 6% is not allowed.

Do seller concessions affect FHA loan amount?

No. Seller concessions do not adjust the loan amount you qualify for. The concessions simply reduce your out-of-pocket expenses at closing within FHA limits.

The Bottom Line

FHA seller concessions allow the seller to pay a portion of the buyer’s closing costs, making the home more affordable. Savvy buyers can negotiate with the seller to lower their upfront costs while staying within the 6% FHA limit.

If you have any other questions about FHA seller concessions, reach out to an FHA loan expert. Getting answers upfront will help you craft the best offer and optimize the seller’s contribution to your closing costs.