What Is the Max Seller Concessions on FHA?
Navigate FHA loan requirements: Understand the maximum seller concessions allowed and how they can assist with your closing costs.
Federal Housing Administration (FHA) loans serve as a valuable resource for individuals seeking homeownership, particularly those who might face challenges securing traditional financing. These government-backed mortgages often feature flexible credit requirements and lower down payment options. In FHA loan transactions, seller concessions can ease the financial burden on the buyer by contributing towards certain costs typically borne by the buyer at closing.
Defining Seller Concessions
Seller concessions refer to financial contributions made by a home seller towards a buyer’s closing costs or prepaid expenses during a real estate purchase. From the buyer’s perspective, these concessions reduce the amount of cash required upfront to complete the home purchase. They are not direct cash payments to the buyer but rather credits applied at the closing of the transaction.
From the seller’s viewpoint, offering concessions can serve as a negotiation tool, potentially making their property more attractive to prospective buyers. This can be particularly useful in scenarios where a buyer has limited liquid funds beyond the down payment. By covering some of the buyer’s expenses, the seller can help ensure the transaction moves forward smoothly. These concessions are part of the purchase agreement and are finalized as credits at the settlement.
FHA’s Maximum Limit
The FHA establishes a clear maximum limit on the amount sellers can contribute towards a buyer’s closing costs and prepaid expenses. For FHA-insured mortgages, the maximum seller concession is capped at 6% of the lesser of the home’s sales price or the appraised value. This limit helps prevent inflated property values and ensures the loan amount remains aligned with the home’s actual worth.
To illustrate, consider a home with a sales price of $250,000 and an appraised value of $255,000. Since the sales price is lower, the 6% limit would be calculated based on $250,000. In this example, the maximum seller concession would be $15,000 ($250,000 x 0.06). Any amount exceeding this 6% limit would typically result in a dollar-for-dollar reduction in the loan amount, or the excess may be disallowed.
Permissible Uses and Exclusions
FHA seller concessions are designated to cover certain costs associated with the home purchase, directly benefiting the buyer at closing. Permissible uses for these funds include:
Loan origination fees
Appraisal fees
Title insurance expenses
Attorney fees
Recording fees
Discount points to reduce the loan’s interest rate
Prorated property taxes
Homeowner’s insurance premiums
FHA upfront mortgage insurance premium (UFMIP)
Repairs required by the FHA appraisal
Seller concessions cannot cover certain items. These funds cannot be used for the buyer’s down payment, existing debts like credit cards, or to establish reserve funds or savings. Using concessions for unapproved items or exceeding the FHA’s 6% limit can lead to a reduction in the loan amount or require adjustments to the sales price.