FHA Seller Concessions: What Buyers Need to Know

When buying a home with an FHA mortgage, buyers often ask the seller to agree to seller concessions to help cover their closing costs. Seller concessions, also known as seller credits, are amounts the seller agrees to pay toward the buyer's closing costs and prepaid items.

FHA loans have limits on the amount the seller can contribute. Understanding these FHA guidelines is vital for homebuyers using an FHA loan to buy a home.

What Are Seller Concessions?

Seller concessions are amounts the seller agrees to pay to help the buyer pay for their closing costs, prepaid items, and other fees associated with obtaining a mortgage. Typical closing costs paid by the seller include:

Origination fees
Appraisal fees
Credit report fees
Prepaid interest
Homeowners insurance premiums
Property taxes
Title insurance fees
Transfer taxes

Seller concessions cannot be used for the buyer's down payment or monthly mortgage payments. The benefits must be disclosed on the HUD-1 settlement statement and are usually credited toward the buyer's closing costs at closing.

FHA Lender Limits on Seller Concessions

FHA guidelines limit seller concessions to 6% of the home's purchase price. This means that the seller could contribute up to 6% of the closing costs or other expenses associated with the home purchase. However, it's important to note that these guidelines can change over time, so it's always a good idea to check with a current FHA lender or consult the latest FHA guidelines to ensure accuracy.

Seller concessions can be a valuable benefit for homebuyers, especially first-time buyers with limited funds for closing costs. These concessions can help cover expenses such as appraisal costs, title insurance, and other fees associated with obtaining an FHA loan, making homeownership more accessible to a broader range of individuals.

Why Sellers Offer Concessions

There are a few reasons why a seller may agree to pay closing costs for the buyer:

To attract buyers. In a competitive housing market, offering to pay closing costs can make the seller's home more appealing to buyers.

To negotiate a higher purchase price. When the seller pays closing costs, the buyer can pay more for the home.

To sell the home faster. Offering concessions can help motivate buyers to move forward.

To bridge the appraisal gap. If the home appraises for less than the purchase price, the seller can use concessions to cover the difference.

Benefits for FHA Buyers

FHA buyers can benefit from seller concessions in a few key ways:

Lower out-of-pocket costs: The buyer pays less upfront on the closing day since the seller agrees to pay for closing expenses.

Potentially buy a more expensive home. The buyer may be able to afford a higher purchase price when the seller pays closing costs.

Easier to meet closing requirements. Concessions can help the buyer complete the FHA's minimum required investment (MRI) at closing.

Increase the chances of an appraisal match. Concessions give flexibility if the appraisal comes in low.

Tips for Buyers Using Seller Concessions

If you're purchasing a home with an FHA loan, keep these tips in mind when negotiating concessions:

Ask for concessions early. Request the seller's credits upfront rather than waiting until closing.
Know the limits. Understand how much the seller can pay based on FHA guidelines. Don't ask for more than is allowed.
Do the math. Add up your closing costs to determine how many concessions to ask for.
Subtract concessions from the purchase price. Reducing the price dollar-for-dollar prevents over-concession.
Watch out for inflated prices. Make sure the purchase price is reasonable compared to the home's value.
Get all concessions in writing. Have the seller agree to pay the honors in the purchase agreement.
Disclose all contributions. Report gifts or other assistance from family members to your lender.
Talk to your lender. Keep your loan officer informed about any concessions or contributions.

Seller Concessions with Other Loans

The use of seller concessions is not limited to FHA loans. Seller credits can also apply to conventional loans and other loan types.

Conventional Loans

For Down Payments Less Than 10%: If the buyer's down payment is less than 10% of the purchase price, the typical maximum seller concession is 3%.
For Down Payments Between 10% and 25%: If the buyer's down payment falls from 10% to 25%, the maximum seller concession may increase to 6% of the purchase price.
For Down Payments Over 25%: If the buyer is making a substantial down payment, often over 25%, there may be more flexibility in negotiating seller concessions, and it could potentially be higher than 6%. However, this can vary depending on the lender's policies and the specific circumstances of the transaction.

It's important to note that these are general guidelines, and individual lenders may have their policies regarding seller concessions. The seller's willingness to provide accommodations can also play a role in the negotiation.

Always consult with your lender or mortgage broker to understand the specific seller concession limits and terms applicable to your conventional loan, as these guidelines can change over time and may vary between lenders.

VA Loans

VA loans allow the seller to pay all reasonable and customary closing costs. There are no set limits on the amount of seller concessions for VA loans. However, the seller's willingness to pay closing costs cannot be contingent on the buyer using VA financing. Prepaid expenses are limited to 4% of the sales price.

USDA Loans

Seller concessions on USDA (United States Department of Agriculture) loans are subject to specific guidelines set by the USDA. The USDA guidelines limit seller concessions to 6% of the property's purchase price.

This means that, under USDA loan guidelines, the seller could contribute up to 6% of the home's purchase price toward the buyer's closing costs and prepaid items. These concessions can help buyers cover loan origination fees, escrow impounds, and other closing costs.

The Bottom Line

Seller concessions can be an excellent way for buyers to lower their upfront costs when purchasing a home. But it's essential to understand the guidelines for your mortgage loan type. Be sure to speak with your loan officer to determine the specifics of seller credits for your particular situation. With the right financing strategy, seller concessions could help you buy your dream home!

SOURCE:
https://www.hud.gov/sites/documents/ia-sellerconceficoscore.pdf
https://www.bankrate.com/real-estate/seller-concessions/
https://gustancho.com/lender-credit-and-sellers-concessions/
https://findmywayhome.com/first-home/using-seller-concessions-when-buying-your-home/