Can the Seller Pay Your FHA Closing Costs? Here’s How Much Help You Can Get

Here’s one of those FHA rules that sounds simple until you’re actually writing an offer:

“The seller can pay up to 6% of my closing costs, right?”

Yes.

But that sentence needs a little explaining, because FHA seller concessions are one of those things that get repeated so often that people start assuming the seller can just hand the buyer 6% of the purchase price and everybody goes home happy.

That is not how it works.

FHA allows an interested party — usually the seller — to contribute up to 6% of the sales price toward certain borrower costs.

That can be incredibly helpful, especially for a buyer who has enough money for the FHA down payment but doesn’t necessarily have another pile of cash sitting around for closing costs, prepaid taxes, homeowners insurance and everything else that shows up at closing.

But you can only use the credit for eligible costs that actually exist.

You do not get the leftovers in cash.

And the seller cannot use that credit to quietly make your FHA down payment for you.

Let’s use an actual example

Say you’re buying a home for $300,000.

Six percent of $300,000 is $18,000.

So technically, the FHA interested-party contribution limit could be as high as $18,000.

That does not mean you should automatically negotiate an $18,000 seller credit.

If your eligible closing costs, prepaid expenses and discount points only add up to $11,000, you generally don’t get to take the remaining $7,000 home with you.

That’s the part that catches people.

A seller concession is there to cover legitimate costs associated with the transaction. It is not a rebate check for buying the house.

So when your Realtor says, “Let’s ask for 6%,” the next question should probably be:

“Do I actually have enough costs to use 6%?”

That is a much better conversation to have before the purchase agreement is written.

What can an FHA seller concession actually pay?

There can be quite a bit of flexibility here.

Depending on the transaction, the seller contribution may be used toward things like:

• Lender closing costs
• Title and settlement charges
• Prepaid homeowners insurance
• Prepaid property taxes
• Initial escrow deposits
• Discount points
• Certain financing costs

That can make a huge difference for an FHA buyer.

Think about somebody buying that $300,000 house with the standard FHA minimum investment.

They may have their down payment figured out, but then they see the rest of the cash-to-close number and think:

“Wait. Where did all of that come from?”

That’s because the down payment and closing costs are two different things.

We break that distinction down in our FHA down payment rules guide, because this is one of the most common misunderstandings buyers have when they start looking at FHA financing.

No, the seller cannot pay your FHA down payment

This one is worth saying plainly.

The seller concession is not a workaround for the borrower’s required minimum investment.

You cannot structure the transaction so the seller simply gives you your FHA down payment and calls it a closing-cost credit.

FHA has specific rules for where the borrower’s required funds can come from.

Gift funds from an eligible donor may be acceptable. Certain down-payment assistance programs may be acceptable. Your own verified funds may obviously be acceptable.

But a seller who has a financial interest in getting the transaction closed cannot simply fund the buyer’s required investment.

This is why the loan officer, Realtor and title company all need to be on the same page when the offer is being structured.

What happens if the seller credit is too big?

This happens more often than people realize.

Maybe the buyer negotiated a large seller credit because everyone expected higher closing costs.

Then the rate improves.

Or some fees come in lower than expected.

Or the buyer originally planned to pay discount points and then decides not to.

Now suddenly there is more seller credit than there are eligible expenses.

You usually cannot just say:

“Cool. Send me the extra $3,200.”

Nope.

The loan may need to be restructured.

Sometimes there are legitimate ways to use more of the credit — for example, toward eligible discount points or other allowable costs — but that needs to be discussed with the lender before closing.

And there is another important FHA rule here: if interested-party contributions go beyond FHA’s limits, the excess can be treated as an inducement to purchase and can affect the value used to calculate the mortgage.

In normal-person language: going overboard with seller concessions can actually create a financing problem.

Can the seller pay discount points?

Yes, eligible seller contributions can generally be used toward discount points.

This can get interesting when rates are high.

Let’s say the seller doesn’t want to reduce the purchase price by $10,000.

The buyer might care much more about getting $10,000 toward closing costs and a rate buydown.

Depending on the numbers, that credit could potentially reduce the buyer’s upfront cash requirement and lower the monthly payment.

But this is where I would slow down and actually run the math.

Paying points only makes sense when the savings justify the upfront cost.

A credit that sounds fantastic can be wasted if you use it to buy down a rate on a mortgage you refinance eighteen months later.

That’s exactly why looking at the whole loan matters more than looking at one number.

Seller credit or lower purchase price?

This is one of my favorite mortgage questions because there is no automatic answer.

Imagine the seller is willing to give up $10,000 to make the deal work.

You could potentially negotiate:

Option A: Reduce the price by $10,000.

Or:

Option B: Keep the price where it is and receive a $10,000 seller contribution toward eligible closing costs.

Which one is better?

Depends.

A $10,000 price reduction does not reduce your mortgage payment by $10,000.

It reduces the amount being financed by a relatively small amount each month.

For a buyer who is short on cash, a $10,000 credit toward closing could be much more valuable today than a modest reduction in the monthly principal-and-interest payment.

On the other hand, if the buyer already has plenty of cash and very few closing costs, reducing the price may make more sense.

This is why I wouldn’t negotiate seller concessions in a vacuum.

Have the lender run the numbers.

What if the house needs repairs?

This is where seller concessions and FHA property requirements sometimes get mixed together.

A seller agreeing to repair something is not necessarily the same thing as giving the buyer a closing-cost concession.

And simply giving the buyer a “repair allowance” can create a completely different FHA issue.

FHA has specific property requirements, and if the appraisal identifies a condition that must be repaired before closing, throwing some extra money at the buyer does not necessarily solve it.

The repair itself may need to be completed and verified.

If you’re buying a property with condition issues, it helps to understand that FHA reviews both the borrower and the property. Our FHA loan requirements guide explains why a perfectly qualified borrower can still run into problems because of the house.

Why seller concessions are such a big deal for first-time buyers

A lot of first-time buyers obsess over the down payment.

Understandably.

If someone tells you that you need 3.5% down, you start saving toward that number.

Then you get closer to actually buying and discover:

There are lender fees.

Title fees.

Insurance.

Taxes.

Escrows.

Prepaids.

The appraisal.

Maybe points.

Suddenly the amount you need at closing is quite a bit more than the number you had in your head.

That is where a properly structured seller concession can turn a deal from uncomfortable into manageable.

It can allow the buyer to keep more money in savings instead of walking out of closing with $73 left and a new house that immediately decides it needs a water heater.

And yes, houses have impeccable timing when it comes to that stuff.

One thing I would not do

I would not wait until three days before closing to figure out whether you can actually use the seller credit you negotiated.

Have the lender estimate the costs early.

Then revisit the numbers once you have the Loan Estimate and again as you get closer to closing.

FHA transactions already have enough moving pieces without discovering at the finish line that you negotiated a credit you cannot fully use.

If you’re wondering how all of those moving pieces affect the closing schedule, our FHA closing timeline walks through what actually happens between the accepted offer and getting the keys.

So how much should you ask the seller for?

Not automatically 6%.

Ask for what makes sense for the transaction.

Maybe that is 2%.

Maybe it is 3%.

Maybe it really is the full 6%.

The important part is knowing what you are trying to accomplish.

Are you short on cash to close?

Are you trying to preserve emergency savings?

Are you buying down the interest rate?

Are taxes and insurance unusually high?

Are you choosing between a lower price and a larger credit?

Those are real questions.

“FHA allows 6%, so let’s ask for 6%” really isn’t a strategy.

The question I would ask before writing the offer

Ask the lender this:

“Based on the numbers you have right now, how much seller credit could I realistically use?”

That one question can prevent a lot of nonsense later.

Then have your Realtor structure the offer around the financing strategy instead of guessing.

FHA seller concessions are genuinely useful. They can reduce the amount of cash a buyer needs at closing, help cover prepaid expenses and even help with the cost of obtaining a lower interest rate.

They just need to be structured correctly.

And like a lot of mortgage guidelines, the headline version — “FHA allows 6%” — is true.

It just isn’t the whole story.

Sources

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

Educational information only. FHA guidelines and individual lender requirements can change. This article is general mortgage education and is not financial, legal, tax or lending advice. Confirm requirements for your specific transaction with your lender or other qualified professional.

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