Understanding seller concessions can help you save on out-of-pocket costs when buying a home with an FHA loan. These loans already offer lower down payments and flexible credit requirements, and seller concessions can make homeownership even more affordable.
By negotiating with the seller, you may be able to reduce your FHA loan closing costs and upfront expenses, meaning more money in your savings account.
In a nutshell:
Seller concessions are costs a seller agrees to pay on behalf of the buyer to reduce their upfront expenses.
FHA max seller concessions are capped at 6% of the home's purchase price.
Seller concessions can only be used for specific costs, such as closing costs and prepaid expenses.
Seller concessions cannot be used for down payments
What are seller concessions?
Seller concessions are contributions a seller agrees to make toward the buyer’s closing costs, prepaid expenses, and other allowable fees. These concessions help reduce the financial burden on the buyer, making the home purchase more feasible.
How do FHA seller concessions work?
With an FHA loan, a seller can contribute up to 6% of the home’s purchase price toward the buyer's allowable costs. This means that if a home costs $300,000, the maximum concession the seller can offer is $18,000.
FHA max seller concessions are especially helpful for first-time homebuyers who may have limited funds for closing costs, and who make up over 82.20% of FHA loan applicants.
What can FHA seller concessions be used for?
There are restrictions on how seller concessions can be used with FHA loans.
Seller concessions can help cover certain costs, including:
Loan origination, processing, and underwriting fee closing costs
Prepaid expenses like homeowner’s insurance, property taxes, and escrow setup
Discount points to lower the interest rate
Appraisal and inspection fees
Title insurance and attorney fees
However, seller concessions cannot be used for:
Your down payment
Paying off debts or credit cards
Repairs or improvements beyond FHA-required fixes
Reserve funds or savings for future payments
Seller Concessions in a Buyers vs. Sellers Market
Negotiating seller concessions is often easier in a buyer’s market, where there are more homes for sale than buyers looking to purchase. Sellers in these conditions may be more willing to contribute to closing costs to attract buyers.
In a seller’s market, where demand exceeds supply, sellers have less incentive to offer concessions, as they can often sell their home without needing to provide additional incentives.
FHA Max Seller Concessions Example
Let’s say a borrower purchases a $250,000 home with an FHA loan. The seller agrees to provide the maximum 6% seller concession, which amounts to $15,000. This contribution can be used to cover various costs associated with the home purchase, significantly lowering the buyer’s upfront expenses.
For example, the funds could cover loan origination fees of $2,500, which are charged by the lender for processing the loan. Appraisal and inspection fees, which ensure the property meets FHA’s standards, could be paid with $600 of the concession. The seller could also help cover $4,200 for the mortgage insurance premium (MIP) upfront fee.
In addition, $3,500 could go toward escrow and prepaid taxes, which are necessary to set up the buyer’s escrow account. Title insurance and closing attorney fees, totaling $2,700, would be another area where the concession could be applied. At the end of the transaction, the buyer could use $1,500 to purchase discount points to lower their interest rate, resulting in potential savings over the life of the loan.
Through this example, you can see that a $15,000 seller concession can be a game-changer, allowing the buyer to reduce significant upfront costs, and making the process of purchasing a home much more affordable.
FHA Seller Concessions vs. Other Loan Types
Most mortgage loan types allow seller concessions, but there are limits on how much a seller can contribute. Here’s a look at the maximum seller concessions allowed by loan type:
Seller Concessions on FHA Loans vs. Other Loan Types
| Loan Type | Max Seller Concession |
|---|---|
| VA Loan | 4% |
| FHA Loan | 6% |
| USDA Loans | 6% |
| Conventional Loan | 3% to 9% |
FHA seller concessions provide a valuable tool for homebuyers looking to minimize upfront costs. By negotiating with the seller, FHA buyers can receive up to 6% of the home's purchase price in concessions, covering closing costs and other approved expenses.
With over 11 years in the mortgage industry, Matt Roy has spent the last 7 years as an underwriter. He’s passionate about understanding the “why” behind lending decisions and helping homebuyers succeed.
