What Is the Maximum Seller Concession for an FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration, designed to help borrowers with lower credit scores or limited funds secure homeownership. These loans are often suitable for first-time homebuyers due to their flexible qualification criteria and lower minimum down payment requirements. In real estate transactions involving FHA loans, seller concessions represent a valuable tool that can reduce the buyer’s out-of-pocket expenses at closing.

Understanding Seller Concessions

Seller concessions are costs a home seller agrees to pay on behalf of the buyer during a real estate transaction. Negotiated as part of the purchase agreement, they help buyers cover various expenses, reducing the cash needed at closing.

The amount of a seller concession is often expressed as a percentage of the home’s sales price or as a specific fixed dollar amount. This negotiated benefit is then applied to cover certain buyer-related costs, rather than directly reducing the sales price of the property itself. While beneficial for buyers, these concessions also assist sellers by making their property more attractive, especially in market conditions where buyers may need additional financial incentives.

FHA Seller Concession Limits

For FHA-insured mortgages, seller contributions are limited to 6% of the lesser of the home’s sales price or its appraised value. This 6% limit prevents artificially inflated sales prices and ensures loan integrity.

For instance, if a home is listed for $200,000 and appraises for $195,000, the maximum seller concession would be based on the $195,000 appraised value. If the seller contributes more than this 6% limit, the FHA requires a dollar-for-dollar reduction in the calculated loan amount.

Allowed and Prohibited Seller Concession Uses

FHA seller concessions are specifically permitted for certain types of costs incurred by the buyer during the home purchase process. These eligible expenses generally include closing costs and prepaid items. Examples of costs that can be covered are loan origination fees, discount points used to lower the interest rate, appraisal fees, credit report fees, and title insurance premiums. Additionally, concessions can be used for recording fees, prepaid property taxes, and homeowner’s insurance premiums. The upfront mortgage insurance premium (MIP) required on FHA loans is also an allowable expense for seller contributions.

However, FHA regulations explicitly prohibit the use of seller concessions for the buyer’s down payment. Concessions cannot be used for cash back to the buyer, paying off the buyer’s personal debts or credit cards, or for repairs beyond those specifically required by FHA inspection standards. Including personal property as part of a concession may also be considered an inducement that could result in a loan amount reduction if it unduly inflates the property’s value.

Key Considerations for Seller Concessions

While seller concessions can significantly reduce the cash a buyer needs at closing, they do not decrease the actual principal amount of the mortgage loan. The mortgage amount remains based on the sales price less the buyer’s down payment.

The appraisal plays a significant role in transactions involving seller concessions. FHA appraisers are required to identify and report the dollar amount of all concessions and adjust comparable sales if concessions affected the sales price. This process helps ensure that the property’s appraised value accurately reflects its market value, preventing artificial inflation due to excessive concessions.

All agreed-upon seller concessions must be clearly documented within the purchase agreement. This clear documentation is necessary for the lender and appraiser to properly process the loan and ensure compliance with FHA guidelines.