The Basics

• Sellers may help a buyer purchase their home by providing money to cover a portion of their settlement costs. Settlement costs consist of one-time and recurring fees associated with a sales transaction and the FHA loan acquisition. On average, closing costs are approximately 2 to 3 percent of the sales price, although the percentage may vary by region. FHA limits the amount of closing costs a seller can cover to those customary and reasonable costs necessary to close the loan.
  
  

Size

• Seller concessions may not exceed 3 percent of the sale price as of 2010, when FHA reduced the maximum from 6 percent in an effort to circumvent price inflation and inducements to buy. Although a seller may provide incentives, inducements are prohibited and result in a dollar-for-dollar reduction of the sales price or appraised value, whichever is less. An inducement is any amount paid on behalf of the buyer exceeding the 3 percent maximum allowed. An example is when a seller pays the broker commission on the sale of the buyer's current residence.
  
  

Identification

• Seller concessions must be disclosed in the sales agreement, accounted for on the appraisal report, and their payment identified on the Final HUD-1 Settlement Statement. The FHA appraiser must adjust comparable sales values to account for concessions. Due to the Real Estate Settlement and Procedures Act regulations, seller concessions may only appear as a lump-sum buyer credit on the HUD-1. Seller concessions may cover the following buyer's costs: loan discount points, loan origination fees, interest rate buy downs, payment of HOA fees, builder incentives and personal property.
  
  

Considerations

• The lender may not charge the borrower a tax service fee, an FHA non-allowable cost. As such, concessions may not be used to cover this cost on behalf of the borrower.
  The borrower must contribute the minimum FHA down payment requirement to the transaction. Seller may not gift or cover the down payment amount in any way. In 2011, the down payment requirement equaled 3.5 percent of the sales price. FHA borrowers that need assistance for a down payment may acquire it through secondary financing providers approved by the Department of Housing and Urban Development.