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Lender Credit or Seller Concessions For Closing Costs
Is it easy to qualify for lender credit and/or seller concession to pay for closing costs?
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4 Replies
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When qualifying for lender credits or seller concessions to pay closing costs, there are several important things to consider. Let’s take a look:
Lender Credits
What They Are: In exchange for an increase in the loan interest rate, the lender will offer money to help cover the closing fees.
Qualification:
Credit Score: A higher credit score, on average, makes it easier to qualify for lender credits.
Loan Type: Certain loan programs might have specific policies regarding lender credits.
Debt-to-Income Ratio (DTI): A lower DTI increases your chances of qualifying for lender credits.
Impact on Loan: While it lowers the cash you must pay out of your pocket at closing, the increased loan fee may mean a greater portion of the monthly payment due to the larger interest charged.
Seller Concessions
What They Are: Usually part of the purchase agreement, a seller concession is an allowance by the seller toward the buyer’s closing costs.
Qualification:
Negotiation: Seller concessions may be easier to obtain in specific markets. For instance, sellers are more likely to concede during a buyer’s market.
Contract Terms: The exact dollar amount of the desired concession must be indicated in the purchase agreement.
Loan Type: Different loans cap the amount the seller can pay towards a closing cost, which is usually between 3% and 6% of the purchase price.
Market Conditions: In a competitive market, sellers may be less likely to make concessions, while in a slow one, they may be more ready to help.
Tips on Obtaining Concessions or Credits
Engage an Experienced Agent: A real estate agent with good knowledge of the local market can help to negotiate better for seller concessions.
Be Open. One option, which may depend on your wider approach to closing dates and other terms, is paying the seller’s concessions.
Dealing with Lenders: Mention to your mortgage broker or lender upfront about the possibility of any credit items that the lender may offer, and based on your profile, advise which options are available to you.
That said, it is not “easy” to qualify for lenders’ credits or seller concessions. However, it is possible with the right approach and conditions. Awareness of barriers, such as finances and market dynamics, will help you navigate this process.
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Lets go over a seller concession scenario . Lets say a homebuyer wants to ask the maximum seller concession on a $600,000 plus home. The maximum FHA loan limit for the area in 2026 is $541,287. The down payment requirement is 3.5% down payment due to being FHA. The homebuyer is seeking a DPA of the 3.5%. At what price would the homebuyer need to get an executed real estate contract that will cover the 6% seller concession PLUS the 3.5% down payment FHA requires for the down payment and still meet the maximum $541,287 maximum FHA loan limit?
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FHA Seller Concession and Down Payment Assistance Scenario
Let’s assume a homebuyer wants to purchase a home in an area where the 2026 FHA loan limit is $541,287. The buyer qualifies for the minimum 3.5% FHA down payment and plans to obtain down payment assistance for the entire 3.5%. The buyer also wants to request the maximum 6% seller concession.
The seller concession and the down payment must be treated separately. A seller concession may be used toward eligible closing costs, prepaid expenses, discount points, and other permitted settlement charges. It cannot be used to satisfy the buyer’s required 3.5% minimum investment.
To determine the highest purchase price that can be financed with a base FHA loan of $541,287 and a 3.5% down payment, divide the loan limit by 96.5%.
The calculation is:
$541,287 ÷ 96.5% = approximately $560,919
Therefore, the highest theoretical contract price would be approximately $560,919, assuming the home appraises for at least that amount.
At a purchase price of approximately $560,919, the buyer’s required 3.5% down payment would be about $19,632. The down payment assistance program could potentially provide this amount, subject to the program’s guidelines.
The maximum 6% seller concession would be approximately $33,655. However, the buyer could only use the amount needed to cover eligible closing costs and prepaid expenses. Any unused portion of the seller concession could not be given to the buyer as cash or applied toward the required down payment.
What Happens If the Purchase Price Is $600,000?
A buyer may still purchase a $600,000 home with FHA financing, but the down payment would be greater than 3.5% because the FHA base loan cannot exceed the $541,287 area loan limit.
On a $600,000 purchase, the difference between the sales price and the maximum FHA base loan would be $58,713.
A down payment assistance program providing 3.5% of the $600,000 purchase price would contribute $21,000. The buyer would still need approximately $37,713 from another acceptable source.
The additional funds could potentially come from the buyer’s own money, an eligible gift, a second down payment assistance source, or another source permitted under FHA and lender guidelines.
The maximum 6% seller concession on a $600,000 purchase would be $36,000. That money could help cover eligible closing costs, prepaid property taxes, homeowners insurance, discount points, and other allowable charges. It could not be used to cover the $37,713 down payment shortage.
Why the Seller Concession Cannot Be Added to the Down Payment
It would be incorrect to subtract both the 6% seller concession and the 3.5% down payment from the sales price when calculating the maximum FHA loan.
The 6% seller concession is not equity and does not reduce the buyer’s required investment. It only helps pay allowable settlement costs. The purchase price and required down payment must still support a base FHA loan that does not exceed the applicable loan limit.
Bottom Line
With a maximum FHA base loan of $541,287 and down payment assistance covering only the required 3.5% down payment, the highest theoretical purchase price would be approximately $560,919.
The buyer could purchase a home for $600,000 or more, but the required down payment would increase because of the FHA loan limit. The 6% seller concession could cover allowable closing costs, but it could not replace the additional down payment needed above the FHA loan limit.
The financed FHA upfront mortgage insurance premium is generally added to the base loan amount separately. Therefore, the final total loan balance may be higher than the FHA base loan limit.
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Here is the updated case scenario using the seller’s $580,000 counteroffer:
Can This FHA Buyer Purchase the Home for $580,000 With 3.5% Down Payment Assistance?
The home seller has countered the buyer’s offer at $580,000. The buyer is using an FHA loan and has down payment assistance covering 3.5% of the purchase price. The buyer has no additional funds available for the down payment or closing costs.
The FHA loan limit for the area is $541,287. HUD established $541,287 as the 2026 FHA one-unit loan-limit floor for FHA case numbers assigned on or after January 1, 2026.
Under normal FHA purchase guidelines, a qualified borrower may finance approximately 96.5% of the adjusted property value, leaving a minimum required investment of 3.5%.
However, once the sales price exceeds the amount supported by the local FHA loan limit, the buyer must make up the difference.
Calculating the Required Down Payment at $580,000
The seller’s counteroffer is $580,000.
The maximum FHA base loan is $541,287.
The difference between the purchase price and the maximum FHA base loan is:
$580,000 minus $541,287 equals $38,713.
Therefore, the transaction requires at least $38,713 toward the purchase price, regardless of the normal 3.5% FHA down payment calculation.
The buyer’s 3.5% down payment assistance would equal:
$580,000 multiplied by 3.5% equals $20,300.
After applying the $20,300 down payment assistance, the buyer would still be short:
$38,713 minus $20,300 equals $18,413.
The buyer would need an additional $18,413 from another acceptable source before considering closing costs.
Can the Seller Concession Cover the $18,413 Shortage?
No. The seller concession cannot be used to cover the buyer’s down payment shortage.
At a $580,000 purchase price, the maximum 6% seller concession would be:
$580,000 multiplied by 6% equals $34,800.
The seller could contribute up to $34,800 toward eligible closing costs, prepaid expenses, discount points, interest-rate buydowns, and other FHA-permitted settlement charges. FHA’s current requirements are contained in HUD Handbook 4000.1.
However, the seller concession does not increase the maximum FHA base loan and cannot replace the buyer’s required down payment. The buyer cannot receive any unused seller concession as cash at closing.
Therefore, even if the seller pays every allowable closing cost, the buyer will still need to document an acceptable source for the remaining $18,413.
Can the Buyer Close with No Money Out of Pocket?
Not under the scenario as currently structured.
The buyer has $20,300 in down payment assistance, but the purchase requires $38,713 between the sales price and the FHA base loan. That leaves an $18,413 financing gap.
The deal could work if the buyer receives at least $18,413 from another FHA-eligible source. Depending on the program and lender requirements, possible sources may include an eligible gift, additional down payment assistance, documented personal funds, or another permitted form of secondary financing.
The seller concession could then be used to cover the buyer’s eligible closing costs and prepaid expenses.
The exact amount of the seller concession should be based on the lender’s estimated closing costs. Requesting the full $34,800 would not benefit the buyer unless there are enough eligible charges to use it.
What Price Would Work with Only 3.5% Down Payment Assistance?
When the FHA base loan is limited to $541,287, the highest theoretical purchase price supported by a 3.5% down payment is approximately $560,919.
The calculation is:
$541,287 divided by 96.5% equals approximately $560,919.
At a $560,919 purchase price, the 3.5% down payment would be approximately $19,632. The maximum FHA base loan would remain approximately $541,287.
Therefore, if the buyer has no money and the down payment assistance only covers 3.5%, the seller would need to reduce the purchase price from $580,000 to approximately $560,919.
That would require a price reduction of approximately $19,081.
The buyer could still request a seller concession at the lower price to cover eligible closing costs. A 6% concession at approximately $560,919 would be about $33,655, although the final credit should not exceed the buyer’s actual allowable costs.
Why the Required Price Reduction Is More Than $18,413
At $580,000, the buyer’s shortage is $18,413 because the down payment assistance equals $20,300.
However, if the seller reduces the price, the 3.5% down payment assistance amount also decreases. Therefore, simply reducing the price by $18,413 would not completely solve the problem.
The sales price must be reduced to approximately $560,919 so that 96.5% of the price equals the $541,287 FHA base loan limit.
Bottom Line
The $580,000 transaction will not work as presently structured if the buyer has no money and only receives 3.5% down payment assistance.
The maximum FHA base loan is $541,287. The total amount needed between the loan and purchase price is $38,713. The buyer’s 3.5% down payment assistance provides $20,300, leaving an $18,413 shortage.
The 6% seller concession can help pay allowable closing costs, prepaid expenses, discount points, and other eligible charges, but it cannot cover the down payment shortage.
To complete the purchase, one of the following would need to happen:
The buyer obtains at least $18,413 from another acceptable FHA source.
The down payment assistance program increases its assistance.
The seller reduces the purchase price to approximately $560,919.
The buyer changes to another financing program that supports a larger loan amount.
This analysis assumes the property appraises for at least the final purchase price and that the down payment assistance program provides exactly 3.5% of the purchase price. The lender and DPA provider must also approve the assistance, seller credit, subordinate financing, and final loan structure.
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