FHA Seller Concessions and Inducements to Purchase: 6% Cap Rules

In an FHA transaction, sellers and other interested parties can contribute up to 6% of the lesser of the sale price or appraised value toward your closing costs, prepaid items, and discount points. FHA seller concessions above that ceiling, or payments that don’t qualify as legitimate closing expenses, are treated as inducements to purchase and reduce the home’s value dollar for dollar before your loan amount is calculated. That reduction shrinks how much you can borrow and pushes more cash to the closing table.

How the 6% Cap Works

HUD’s Single Family Housing Policy Handbook (4000.1) defines “interested parties” as sellers, real estate agents, builders, developers, lenders, and third-party loan originators, meaning anyone who stands to profit from the sale.¹ Their contributions toward your closing costs are pooled and measured against a single ceiling: 6% of the lesser of sale price or appraised value.²

The cap is cumulative. If a seller kicks in 4% and the builder adds another 3%, the combined 7% blows through the limit. The extra percentage point doesn’t just vanish. It gets subtracted from the home’s value before the lender calculates your maximum loan, so every dollar over the line costs you a dollar of borrowing capacity.

There’s a second, less obvious trigger. Even if the total stays under 6%, any amount that exceeds your actual closing costs, prepaids, and discount points is also treated as an inducement. Say your real closing costs total $8,000 on a $300,000 home and the seller contributes $15,000 toward them. The $7,000 surplus is an inducement even though $15,000 is only 5% of the price.² Size the seller’s contribution to match your actual expenses rather than picking a round number.

What Seller Concessions Can Pay For

Concessions cover the documented costs of getting an FHA mortgage closed. Common items include loan origination fees, appraisal charges, credit report fees, title examination and title insurance, and recording fees. Sellers can also pay discount points to buy down your interest rate, cover the upfront mortgage insurance premium (1.75% of the base loan amount), and fund prepaid items like initial escrow deposits for property taxes and homeowner’s insurance.²³

Attorney fees for title work, flood certification, and survey charges qualify as well. The test is whether the expense relates directly to obtaining or closing the mortgage. If it shows up on the Closing Disclosure as part of the transaction, it almost certainly fits.

Interest Rate Buydowns

A seller can fund a permanent buydown through discount points or a temporary buydown structure such as a 2-1 or 1-0 on a fixed-rate mortgage. The full cost counts against the 6% cap.² FHA does not allow temporary buydowns on adjustable-rate mortgages, and the lender must document the buydown terms on the sales contract, the HUD-92900-LT form, and the Closing Disclosure.⁴

What Counts as an Inducement to Purchase

FHA draws a hard line between closing-related expenses and personal perks meant to sweeten the deal. An inducement is any benefit that doesn’t relate to the legal and financial transfer of the property. Paying the buyer’s moving expenses, paying off the buyer’s credit card debt or personal loans, or throwing in an automobile are the classic examples. Each reduces the home’s adjusted value dollar for dollar.

Appliances and Personal Property

Replacing an existing appliance with a new one before settlement is not an inducement, as long as the buyer gets no cash allowance and including the appliance is customary for the area. The exception covers ranges, refrigerators, dishwashers, washers, dryers, carpeting, and window treatments.⁵ Adding brand-new appliances where none existed before, or throwing in high-end upgrades well beyond what was originally installed, crosses the line. Replacement is fine; gift is not.

Rent Credits in Lease-Purchase Deals

If you’re renting the home before buying it through a lease-purchase, any rent credit applied toward the purchase is an inducement to the extent it exceeds fair market rent. Pay $2,000 a month on a home that comparable properties rent for $1,500, and the extra $500 accumulates as an inducement that gets subtracted from the home’s value at closing. The lender will need an independent appraisal or third-party documentation to establish fair market rent.⁶

Real Estate Commissions and the Cap

After the 2024 changes to real estate commission practices, one question dominates: does a seller who pays the buyer’s agent commission burn part of the 6%? Under current FHA policy, no. Commissions paid by the seller are not counted as interested party contributions, as long as they’re customary in the local market and reasonable in amount.⁷ A seller can pay a 3% buyer-agent commission and still contribute the full 6% toward your closing costs.

One related payment does count as an inducement: if the seller agrees to pay the commission on the buyer’s current home (the one being sold to fund this purchase), that payment triggers a dollar-for-dollar reduction to value.⁶ That commission has nothing to do with the property being financed.

Your Down Payment Cannot Come From the Seller

No matter how generous the concessions, they cannot go toward your minimum required investment. FHA requires 3.5% down if your credit score is 580 or above, or 10% if your score falls between 500 and 579. That money must come from your own funds, a family gift, or an acceptable government assistance program.²

The prohibition applies to anyone who benefits from the transaction, directly or indirectly. A down payment assistance program funded by the seller through a third-party intermediary still violates the rule. A governmental entity acting in its official capacity through a homeownership program is the narrow exception, and the lender must document the entity’s enforceable legal obligation to fund the down payment before or at closing.⁶

How Going Over Reduces Your Loan

When contributions cross 6% or include an inducement, the lender doesn’t reject the transaction. The overage is subtracted from the home’s value before the loan-to-value ratio is applied.

Consider a home with a sale price and appraised value of $300,000. The maximum allowable concession is $18,000. If the seller contributes $20,000, the $2,000 excess drops the adjusted value to $298,000. The lender then applies the standard 96.5% LTV to $298,000, producing a maximum loan of roughly $287,570 instead of $289,500. The extra $2,000 in seller help actually costs the buyer about $1,930 in borrowing capacity.⁸

Inducements hit harder because they reduce the adjusted value regardless of where you stand against the 6% cap. Include a $10,000 vehicle in the deal on that same $300,000 home and the adjusted value drops to $290,000 before any closing-cost concessions are measured. The 6% cap is then recalculated against the lower figure, giving you $17,400 in allowable concessions rather than $18,000.

Documentation and Compliance

Every dollar of interested party contributions must appear in three places: the sales contract or another legally binding document, the HUD-92900-LT underwriting form, and the Closing Disclosure. The lender itemizes each contribution so the underwriter can verify the cap.² If a separate agreement outside the sales contract covers any contribution, the lender must also provide a copy to the appraiser.⁴

Sloppy disclosure isn’t a paperwork problem alone. Misrepresenting concessions or hiding inducements in a federally insured mortgage can constitute fraud under federal law. At minimum, inaccurate reporting can result in denial or cancellation of the mortgage insurance certificate, which kills the loan. FHA audits files after closing, and a contribution that appears on one document but not the others is exactly the discrepancy that triggers a deeper review.

1
U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook Glossary
2
U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower
3
U.S. Department of Housing and Urban Development. Appendix 1.0 – Mortgage Insurance Premiums
4
U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook 4000.1
5
U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook 4000.1
6
U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook 4000.1
7
U.S. Department of Housing and Urban Development. FHA INFO 2024-12
8
Federal Register. Federal Housing Administration (FHA) Risk Management Initiatives – Revised Seller Concessions