How FHA Seller Concessions Work

An FHA seller concession can cover eligible closing costs, prepaid expenses, and discount points, but it cannot replace the buyer's required down payment or exceed the costs actually owed.

An FHA seller concession is a contract credit that pays eligible borrower costs at closing. FHA permits interested parties to contribute up to 6% of the sales price, but the credit cannot exceed the eligible costs actually owed or replace the buyer's required down payment.

What the credit can cover

The credit can be applied to eligible origination charges, other closing costs, prepaid items, discount points, and approved permanent or temporary rate buydowns. The amount and purpose must be shown in the sales contract and final closing figures.

The buyer does not receive unused credit as cash. If the contract provides more than the eligible costs, the excess normally provides no benefit unless the parties revise the contract or another eligible cost is added before closing.

What the buyer still pays

The seller concession cannot fund FHA's minimum required investment. On a standard 3.5% down FHA purchase, the buyer still needs an acceptable source for that down payment, although permitted gift or assistance funds may be available under separate rules.

Scenario

A buyer agrees to pay $300,000 for a home. The 3.5% down payment is $10,500, and eligible closing costs and prepaid items total $12,000. A 4% seller concession equals $12,000, so it can cover those costs while the buyer remains responsible for the $10,500 down payment.

A 6% concession would equal $18,000, but it would not automatically save the buyer another $6,000. If eligible costs remain $12,000, the extra credit cannot become cash or down-payment money. By contrast, a 3% concession provides $9,000, leaving the buyer to cover $3,000 of the costs plus the $10,500 down payment, before accounting for earnest money already paid.

Set the amount before the offer is final

The useful request should be based on a realistic loan estimate, expected prepaid taxes and insurance, and any planned rate buydown. The seller also evaluates the credit as part of the offer's total economics, so requesting the maximum without a use for it can weaken the offer without reducing cash to close.

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Calculate the useful credit before writing the offer

Bring the target price, estimated taxes and insurance, available cash, and proposed offer terms. DRG Mortgage can estimate the eligible costs and identify how much seller credit would actually reduce cash to close.

Review Cash to Close

Sources

U.S. Department of Housing and Urban Development: FHA Single Family Housing Policy Handbook 4000.1

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