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Buying a home, with or without an FHA mortgage, means negotiation. If you are a potential FHA borrower and you’ve found a home you want to buy, chances are good that you and the seller will haggle over the basic price, but you could also negotiate over other parts of the sale.

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What is a Seller Concession?

September 14, 2015 - Buying a home--with or without an FHA mortgage--means negotiation. If you are a potential FHA borrower and you’ve found a home you want to buy, chances are good that you and the seller will haggle over the basic price, but you could also negotiate over other parts of the sale.

Could the seller, for example, contribute to your closing costs as an incentive for you to buy?

Could the seller leave behind appliances or other items in the home, once sold? How much are these practices regulated by FHA loan rules?

Contributions made by the seller are known in the real estate and lending worlds as “seller concessions”. These are permitted within a certain set of guidelines set by FHA loan rules and are limited to six percent of the sales price of the home. State law may also have a say in seller concessions, so be sure to ask if there are any other applicable rules aside from the FHA guidelines you’ll see below.

Seller contributions are, as previously mentioned, limited to six percent--any contributions above this limit requires a dollar-for-dollar reduction in the loan amount. That goes for contributions made by the seller or ANY third party.

According to FHA loan rules, “Sales concessions influence the price paid for real estate. For this reason, FHA requires that appraisers identify and report sales concessions and properly address and/or adjust the comparable sale transactions to account for sales concessions in the appraisal of all properties to be security for an FHA- insured loan.”

Borrowers naturally want to know what types of contributions the seller legally make? At the time of this writing, HUD 4155.2, Chapter Four provides the answer:

“Sales concessions may be in the form of any of the following concessions given by the seller or any other party involved in a mortgage transaction:
  • loan discount points
  • loan origination fees
  • interest rate buy downs
  • closing cost assistance
  • payment of condominium fees
  • builder incentives
  • down payment assistance
  • monetary gifts, or
  • personal property”
Certain types of high-value personal property are not permitted as a seller concession–depending on circumstances, some items may be considered “inducements to purchase”. If the seller contributes these high-value items, that contribution results in a reduction in the loan amount based on the value of said contribution.

Borrowers worried about the nature of a particular seller concession offered should discuss them with the lender if there is any doubt as to whether a particular concession is within the boundaries of the rules mentioned above. Some borrowers might be fine with the dollar-for-dollar reduction in the loan amount, depending on the nature of the concession, so it’s important to have that conversation with the lender so learn what the consequences of such concessions might be based on lender standards or state law.