Summary: This article explains the 2015 limits for FHA seller concessions or contributions toward a buyer’s closing costs. It was updated and fact-checked at the time of publication, using HUD Handbook 4155.1, Chapter 2, Section A.
FHA loans are one of the most popular financing programs among home buyers today. They are especially popular among first-time buyers who have limited funds for a down payment and closing costs. Borrowers who use this program can enjoy the benefit of a low down payment, as little as 3.5% of the sale price.
Another benefit is that sellers are allowed to make contributions toward the buyer’s closing costs. Put simply, the seller involved in the transaction is allowed to chip in to help the home buyers pay some, or all, of their loan-related closing costs. In real estate lingo, this contribution is referred to as a “concession.”
But there are limits to how much the homeowner can contribute toward the borrower’s costs. In 2015, seller concessions will be limited to 6% of the sale price. This means the homeowner / seller can pay up to 6% toward the home buyer’s closing costs. Usually, this money comes from the proceeds of the sale. It’s important to note that this concession may not be applied to the down payment.
For more on this subject, let’s refer to the official source.
FHA Seller Concession Limits for 2015: Still at 6%
Seller contribution limits are established and enforced by the Department of Housing and Urban Development (HUD). It is HUD that manages the Federal Housing Administration’s mortgage insurance program.
Here is a relevant quote from HUD Handbook 4155.1, Chapter 2, which deals with “Interested Third-Party Contributions”:
“The seller and/or third party may contribute up to six percent of the lesser of the property’s sales price or the appraised value toward the buyer’s closing costs, prepaid expenses, discount points and other financing concessions.”
You’ll note that this passage does not mention down payments. While borrowers can obtain down-payment gifts from family members and other approved sources, they cannot use a seller concession or contribution for the down payment. This is an important distinction, as well as a common point of confusion among home buyers.
Misinformation Regarding a 3% Cap on Contributions
A few years ago, HUD proposed a reduction in the seller concession limits for FHA-insured home loans. Specifically, they proposed cutting the 6% cap in half, thereby limiting sellers to a maximum closing-cost contribution of 3% in most cases. This proposed change was intended to help restore the agency’s capital reserve fund, which was severely depleted during the housing crash.
In February of 2012, HUD added the following comments to the Federal Register:
“After careful consideration of the issues raised by the commenters, HUD has decided to make the following changes to … reduce the amount of seller concessions permitted as offsets to actual closing costs to 3 percent or $6,000, whichever is greater…”
This proposal met with much resistance from mortgage lenders, realtor groups, and other housing advocates. They argued it would put homeownership out of reach for many of the very people the FHA program was designed to help (those with limited funds for closing costs).
So here we are at the end of 2014, and nothing has really changed. The proposal was put aside. Sellers are still allowed to help buyers pay some of their closing costs. In 2015, the maximum limit for FHA seller concessions will remain at 6% of the appraised value or sale price, whichever is less.
Many well-intentioned bloggers and publishers mistook the aforementioned proposal for an actual policy change, which it was not. As a result, there are now many articles online that claim there is a 3% / $6,000 cap on contributions. This is misinformation.
HUD officials could still follow through on their original proposal sometime in the future, lowering the cap to 3%. But for now, and for at least the first few months of 2015, the contribution cap will remain at 6% of appraisal or sale price.
Not Always a Viable Strategy
Just because you’re allowed to ask for a seller concession on an FHA loan doesn’t necessarily mean it’s a good idea. In a buyers’ market, where homeowners are eager to snatch up any offer they can get, you could get away with this type of strategy. But in a sellers’ market, where there is limited supply and high demand, it can be risky to ask for a contribution toward closing costs — or any type of seller concession, for that matter.
It begs the question: What type of market are we in right now? It varies from one region to the next. Some local markets are still experiencing inventory surpluses and low demand, which means buyers have more negotiating leverage. Other markets, like most major cities in California, have limited supply and high demand (i.e., a sellers’ market).
Home buyers should research local real estate conditions, and shape their buying strategy and offers with those conditions in mind. This is where an experienced real estate agent can prove helpful. An agent can tell you whether or not it’s a good idea to ask for a seller concession toward closing costs, based on local market conditions, pricing, and other factors.
Recap of key points:
- Currently, in 2014, the maximum allowable seller concession for an FHA loan is 6% of the sale price or the appraised value, whichever is less. We expect this cap to remain in place for the first part of 2015, and possibly for the entire year.
- During the course of your research, you might see some mention of a 3% limit or cap on seller-paid closing costs for FHA. That’s because the Department of Housing and Urban Development twice proposed a reduction in the maximum contribution — once in 2010, and again in 2012. These proposals met with fierce resistance and were essentially put on hold.
- If you refer to HUD Handbook 4155.1, the official “rule book” for borrower eligibility and criteria, you’ll see that they still allow seller concessions of up to 6% going into 2015.
- These contributed funds can be applied to the buyer’s closing costs, but not the down payment.
Disclaimer: This article explains how sellers can help pay a home buyer’s closing costs with an FHA seller concession. This information was updated and fact-checked on October 27, 2014. The Department of Housing and Urban Development frequently makes changes to their mortgage-insurance program. As a result, there is a possibility that this article may become outdated as the months go on. We encourage you to visit the official HUD website for the latest information regarding 2015 seller contributions, and other aspects of FHA financing.