No doubt that you need all the help you can get on your journey to home ownership, especially with an FHA-backed loan. Buying a home is a significant investment, and it can be quite challenging to come up with the required down payment and closing costs.
Avenues like seller concessions make the process bearable by allowing sellers to contribute towards your closing costs, which means less money to secure your loan. However, limits to how much a seller can contribute to this effect.
In this blog post, we’ll take a closer look at what seller concessions are and what the maximum seller concession is for an FHA loan.
So, whether you’re a first-time homebuyer or a seasoned veteran, read on to learn everything you need to know about FHA seller concessions.
How Much Can a Seller Contribute on an FHA Loan?
When purchasing a home with an FHA loan, buyers can receive financial help from the seller through seller concessions.
These concessions are funds that the seller contributes towards the buyer’s closing costs, such as appraisal fees, title insurance, and prepaid taxes.
These concessions are designed to help reduce the upfront costs associated with buying a home, making it easier for buyers to secure their loans.
However, there is a cap on the amount the seller can cover for an FHA loan.
The maximum amount of seller concessions allowed on an FHA loan is 6% of the sale price.
Whether you get the full 6% or not, will depend on how well you negotiate with the seller and what they are ultimately willing to pay.
What Does Seller Pay on an FHA Loan?
When it comes to closing an FHA loan, sellers are allowed to contribute towards the buyer’s closing costs. However, there are limits to what they can cover and how much they can contribute.
So, it’s always a good idea to discuss with your lender and real estate agent what expenses the seller can and cannot pay for in your specific situation. If you’re looking to find a home in any of our service areas, give us a call, and we’ll help you figure it out with the seller.
Here are some of the expenses and fees sellers can contribute to:
- Appraisal fees
- Title insurance
- Transfer taxes
- Prorated property taxes
- Real estate agent commissions
Can a Seller Pay Down Payment on an FHA Loan?
One common question that arises when discussing seller concessions is whether a seller can pay for the buyer’s down payment on an FHA loan.
The answer is no; sellers cannot contribute towards a buyer’s down payment on an FHA loan.
The only exception is if the down payment is in the form of a gift from a family member, employer, or other FHA-approved sources.
It’s important to note that if you are given a monetary gift to pay for your down payment, it must be declared that there is no expectation of the gift being returned or otherwise paid back.
For loan types that do not require a down payment, you may consider a USDA loan or USDA construction loan – both come with 100% financing. The downside? FHA loans have a better credit requirement, which combined with other factors, determine how much you qualify for.
How Can I Maximize Seller Concessions for My FHA Loan?
If you’re looking to purchase a home with an FHA loan, maximizing seller concessions can help you save money on upfront costs.
Here are some tips to help you get the most out of your seller concessions:
- Know the limits: As mentioned earlier, the maximum amount of seller concessions allowed on an FHA loan is 6% of the sale price. However, it’s important to note that not all sellers will be willing to offer the full 6%. Knowing the limits beforehand will help you plan accordingly.
- Prioritize your needs: Before negotiating with the seller, make a list of your priorities. Determine which expenses are most important to you and which ones you can cover on your own. This will help you focus your negotiation efforts on the items that matter most.
- Be reasonable: While it’s important to aim high, it’s also crucial to be reasonable in your requests. Asking for too much may turn off the seller and decrease your chances of getting any concessions at all.
- Build rapport with the seller: Building a positive relationship with the seller can go a long way in securing concessions. Be respectful and courteous throughout the negotiation process, and try to find common ground where possible.
- Consider multiple offers: If you’re struggling to get the concessions you need from one seller, consider making offers on multiple properties. This will give you more options and increase your chances of finding a seller who is willing to meet your needs.
By following these tips, you can maximize your chances of securing seller concessions for your FHA loan and save money on upfront costs.
How Do You Negotiate Seller Concessions?
Negotiating seller concessions can be a crucial part of the FHA-loan home-buying process, as it can help you save money on upfront costs.
Here are some useful tips on how to negotiate seller concessions effectively.
- Know the market: Before making an offer, research the local real estate market to determine what is typical for seller concessions in your area. This will give you a better idea of what to ask for and what is reasonable to expect.
- Make a strong offer: Sellers are more likely to agree to concessions if they feel that they are getting a fair deal. Make sure your offer is competitive and takes into account any repairs or updates needed for the property.
- Be specific: When requesting seller concessions, be specific about what you need and why. For example, if you need help with closing costs, provide a breakdown of the fees and expenses you expect to incur.
- Consider trade-offs: If the seller is hesitant to agree to your concession requests, consider offering something in return. For example, you could agree to a shorter closing period or waive certain contingencies.
- Work with your real estate agent: A knowledgeable real estate agent can help guide you through the negotiation process and advocate for your interests. They may also have insights into the seller’s motivations and preferences that can help you make a stronger case for concessions.
Negotiating seller concessions is a two-way street, and both parties must feel confident in what they have to offer or lose. By being prepared, specific, and flexible, you can increase your chances of securing the concessions you need to make your home purchase more affordable.
Frequently Asked Questions
What is the maximum seller contribution on FHA Loans when financing 96.5% of the purchase?
When financing 96.5% of the purchase price with an FHA loan, the maximum amount of seller concessions allowed is still 6% of the sale price. This means that sellers can contribute up to 6% towards the buyer’s closing costs, including fees such as appraisal fees, title insurance, and prepaid taxes.
Again, remember that sellers cannot pay for any repairs the lender requires as part of the loan approval process. The seller is also prohibited from paying for any part of the down payment for the loan.
What is the maximum interested party contribution?
When purchasing a home with an FHA loan or buying and renovating with an FHA 203k loan, interested parties, such as real estate agents or lenders, may also contribute towards the buyer’s closing costs.
Interested parties can contribute up to 6% of the sale price.
Note that interested party contributions cannot be used towards the buyer’s down payment and cannot exceed the actual amount of the buyer’s closing costs.
Additionally, like seller concessions, interested party contributions cannot be used to pay for any repairs required by the lender as part of the loan approval process.
What is the maximum loan-to-value for an FHA loan?
For a single-family home, the maximum LTV ratio is 96.5%, meaning that buyers can finance up to 96.5% of the purchase price with an FHA loan.
This allows buyers to put down a lower down payment than they would need with a conventional mortgage, making homeownership more accessible for those who may not have a large amount of savings.
For multi-unit properties, such as duplexes or triplexes, the maximum LTV ratio is slightly lower at 85%. This is because these types of properties are considered riskier investments than single-family homes and require a larger down payment to mitigate that risk.
It’s important to note that the LTV ratio does not include any seller concessions or interested party contributions that may be used towards closing costs. These amounts are separate from the loan amount and do not affect the LTV ratio. Also, remember that down the line, you can refinance your loan for a better payment term.
Should I Ask for Seller Concessions?
Of course! Having the seller pay for some of your closing costs is an easy way to reduce your overall costs and the amount you will need upfront to secure an FHA loan.
You need all the help you can get for your FHA loan, whether it’s in gift funds, seller concessions, or advice from family and interested-in-your-loan-success allies like us.
As long as the seller concessions stay below 6% of the sale price and you don’t intend to use them as payment for repairs or the down deposit, you should be good to go.
Use the tips above to negotiate and maximize your seller concessions when you begin the conversation with your selected seller.
If you need a lender’s advice, give us a call.
