How Much Can a Seller Contribute on an FHA Loan?

Federal Housing Administration (FHA) loans offer a pathway to homeownership with flexible qualification requirements, often appealing to first-time buyers. A significant aspect of these transactions involves seller contributions, which can help alleviate some of the upfront financial burden for a buyer.

Defining Seller Contributions for FHA Loans

Seller contributions, in the context of an FHA loan, are funds a home seller agrees to pay on behalf of the buyer to cover specific costs associated with the home purchase. These contributions assist buyers with expenses beyond the initial down payment. Such funds are typically applied directly to the buyer’s closing costs or prepaid expenses. These contributions are not given as cash directly to the buyer and cannot be used for the down payment.

The Maximum Contribution Limit

The Federal Housing Administration establishes limits on how much a seller can contribute towards a buyer’s costs. FHA guidelines permit a seller to contribute up to 6% of the lesser of the home’s sales price or its appraised value. This percentage represents a maximum threshold, meaning any agreed-upon contribution cannot exceed this amount. For instance, on a home with a sales price of $250,000, the maximum seller contribution would be $15,000 (6% of $250,000).

Permitted Uses of Seller Contributions

Seller contributions under FHA loan guidelines cover various allowable expenses, significantly reducing the cash a buyer needs at closing. These funds can be used for the buyer’s closing costs, such as loan origination fees, title insurance premiums, attorney fees, and appraisal fees. Contributions can also cover prepaid expenses like property taxes, homeowner’s insurance premiums, and homeowner association dues. Sellers can contribute towards discount points, which are fees paid to the lender to reduce the loan’s interest rate. Seller contributions are strictly prohibited from being used for the buyer’s down payment or to provide any cash back to the buyer after closing.

Impact on the Loan and Other Rules

Any seller contributions must be documented within the final purchase agreement between the buyer and seller. These contributions help reduce the amount of cash a buyer must bring to the closing table, rather than directly reducing the principal amount of the FHA loan itself. The total amount of seller contributions cannot exceed the actual sum of the buyer’s closing costs and legitimate prepaid expenses. The property’s appraisal also plays a role, ensuring the sales price is not artificially inflated to accommodate excessive seller contributions.