2014 FHA Seller Concessions & Seller-Paid Closing Cost Limits

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Are you planning to use an FHA loan to buy a house? If so, you should be aware of a certain rule that allows the seller to pay some or all of your closing costs. It could reduce your upfront, out-of-pocket expense by thousands of dollars. This article provides an updated look at FHA seller concession limits and rules for 2014.

Definition: A seller concession is when the homeowner "concedes" or gives something to the buyer. For instance, a homeowner who is selling a home can contribute money to pay all or some of the home buyer's mortgage-related fees and charges. This is referred to as an FHA seller concession, or seller-paid closing costs. It is often used as an enticement and a negotiating tool.

The FHA has certain limits on how much the seller can contribute toward the buyer's closing costs. Current (2014) guidelines state that the homeowner can pay up to 6% of the purchase price toward the home buyer's closing costs and prepaid items. Prepaid items include such things as taxes, insurance and inspections. These limits have remained the same for the last few years, despite repeated proposals to lower them.

Read: Average FHA closing costs in 2014

FHA Seller Concession Rules for 2014 (Still at 6%)

The Federal Housing Administration's 203(b) Mortgage Insurance Program (commonly known as the FHA loan program) is managed by the Department of Housing and Urban Development, or HUD. It is HUD that establishes all of the rules and requirements for the program. They are the official source of program guidelines. Here is what they say about FHA seller concessions in 2014.

According to HUD Handbook 4155.1, Chapter 2, Section A:

"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."

Proposals, Rumors, and the Current State of Things

There have been rumors in recent years that the FHA was reducing the limit for seller-paid closing costs. These rumors stemmed from a January 2010 press release in which HUD officials did, in fact, propose to "reduce allowable seller concessions from 6% to 3%" in order to "bring the FHA into conformity with industry standards." They made a similar proposal two years later, in January 2012.

Conventional home loans (those that are not backed by the government) typically limit seller-paid closing costs to 3% of the purchase price or appraised value. The 3% limit is usually applied when a borrower makes a down payment below 10%. So HUD's proposed reduction was an attempt to apply this industry-wide norm to FHA loans as well.

But both of their proposals met resistance from housing and real estate industry groups. The bottom line is that these proposals never took effect.

So let's recap the key points we've covered so far:

• Currently, in 2014, the maximum seller concession allowable on an FHA loan is 6% of the sale price or the appraised value, whichever is less.
• 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 concession limit -- once in 2010, and again in 2012.
• But if you refer to HUD Handbook 4155.1, the official "rule book" for borrower eligibility and criteria, you'll see they still allow seller concessions of up to 6% in 2014.
• This contribution can be applied to the buyer's closing costs, but not the down payment.

Full Details in HUD Handbook 4155.1

If you are planning to use an FHA loan in 2014, you should read all of the details regarding seller concessions and contributions. These rules could make a big difference in your out-of-pocket expense when buying a home, so you need to fully understand what is allowed and what's not. Fortunately, you only have a small amount of reading to do. Here's how to find it...

Step 1: Start by doing a Google search for "HUD handbook 4155.1"

Step 2: Go to Chapter 2, Section A, and look for the part that says "Interested Third Party Contributions." This section explains the max allowances for FHA seller-paid closing costs / concessions in 2014.

Step 3: You'll also want to read the section that follows about "Inducements to Purchase." It explains what the lender must do in cases where the homeowner contributes more than 6% toward the buyer's costs. In short, any contributions above the 6% limit will require a dollar-for-dollar reduction in the sale price or appraised value, for purposes of calculating the loan-to-value (LTV) ratio.

Should You Ask the Seller to Pay Closing Costs?

It's important to realize that sellers do not have to contribute anything to an FHA borrower's closing costs. They are allowed to do this under current HUD guidelines. But they are not compelled to do it. There's a big difference.

Seller concessions are often market-dependent. This is true whether you are using an FHA or a conventional loan to buy a house. Consider the difference:

• In a sellers' market (where there are many buyers but limited homes available), a buyer might have a hard time persuading the seller to make a concession of this nature.
• In a buyers' market, homeowners will typically go above and beyond to sell their homes, and sometimes that means contributing to the buyer's closing expenses.

Translation: The likelihood of the homeowner conceding is directly related to the level of market activity.

As a rule of thumb, home buyers can get away with more and bigger requests in a slower market. In a fast-moving market, where there is stiff competition for limited inventory, it may be unwise to ask the seller to pay closing costs.

Disclaimer: This article explains the rules and limits for FHA seller concessions in 2014. We have made every reasonable effort to ensure the accuracy of this document. Still, there is a chance it will become less accurate over time as HUD makes changes and adjustments to the program. For the most current and complete information about seller-paid closing costs, and other aspects of the FHA mortgage insurance program, refer to the official HUD.gov website.