"What Can a Seller Throw In on an FHA Loan, and What Comes Off the Price?"

The text from the listing agent comes in on a Saturday afternoon. The sellers will leave the washer and dryer, throw in the patio set and the grill, and put $3,000 toward fresh paint so you can choose your own colors before you move in. It is a generous offer. On an FHA loan, the washer and dryer, where leaving them is customary, leave your loan exactly where it was, while the patio set, the grill and the paint money all come off the price.

On an FHA loan, a seller can pay your actual closing costs, prepaid items and discount points up to 6 percent of the sales price. A seller can also replace a range, refrigerator, dishwasher, washer, dryer, carpeting or window treatment before closing, with no cash given to you. Most other extras, including decorating allowances, repair allowances, moving costs and furniture, come off the purchase price before FHA figures your loan.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, NMLS #483943, through C2 Financial Corporation, licensed in fifteen states. A seller who wants to help is good news, and how that help is written into your contract decides how much of it reaches you.

FHA's name for the extras that come off the price is inducements to purchase. The term and the full list come from FHA's Single Family Housing Policy Handbook 4000.1, and the same wording appears again in the handbook's manual underwriting section. Both were revised August 19, 2024.

How do FHA inducements to purchase change my loan amount?

An FHA loan is sized from a number the handbook calls the Adjusted Value. On a purchase, the handbook's section on maximum mortgage amounts defines it as the lesser of the "purchase price less any inducements to purchase" or "the Property Value," which is the appraised value. FHA then multiplies the Adjusted Value by the loan-to-value percentage your loan is eligible for, and the result, within your area's FHA loan limit, is the most it will insure.

Inducements enter that math before the percentage does. In the handbook's own words, they "result in a dollar-for-dollar reduction to the purchase price when computing the Adjusted Value of the Property before applying the appropriate Loan-to-Value (LTV) percentage."

So on a $300,000 contract with a $3,000 paint allowance, FHA takes the $3,000 off the price before it sizes your loan, as if you had agreed to pay $297,000. Your contract price stays at $300,000, your loan is figured from $297,000 unless the appraisal comes in lower, and the gap between the price and the loan gets wider. That gap is part of the cash you bring to closing.

Rolling closing costs into an FHA loan runs into the same Adjusted Value math from the other side.

The FHA inducements to purchase, item by item

The handbook says the inducements "include, but are not limited to" the items below. I've kept its wording, with "you" and "your" where it names the person buying:

• contributions exceeding 6 percent of the purchase price;
• contributions exceeding the origination fees, other closing costs, prepaid items, and Discount Points;
• decorating allowances;
• repair allowances;
• excess rent credit;
• moving costs;
• paying off consumer debt;
• Personal Property;
• sales commission on your present residence; and
• below-market rent, except where you meet the Identity-of-Interest exception for Family Members.

Personal Property is a defined term in the same section. The handbook describes it as "tangible property, other than Real Property, such as cars, recreational vehicles, stamps, coins, or other collectibles." The patio set, the grill and any furniture left behind as part of the price all fit it.

The words "not limited to" mean an extra with no line of its own can still be read as an inducement, so I'd like to read the wording before you sign.

What can a seller include on an FHA loan without it counting as an inducement?

The handbook sets aside a short list of household items. Replacements "are not considered an inducement to purchase, provided the replacement is made prior to settlement and no cash allowance is given" to you. The items are:

• range
• refrigerator
• dishwasher
• washer
• dryer
• carpeting
• window treatment
• "other items determined appropriate by FHA"

A new refrigerator the seller has installed before closing is inside the rule, but $1,800 toward a refrigerator you pick out later is a cash allowance, and that $1,800 comes off the price.

A second sentence covers leaving the items in place. "The inclusion of the items below in the sales agreement is also not considered an inducement to purchase if inclusion of the item is customary for the area." So the washer and dryer staying behind, written into your contract, is fine where including them is customary. Your agent will know what is customary where you are buying.

Seller-paid closing costs on FHA, and where the 6 percent fits

The money a seller puts toward your closing costs has its own name in the handbook: an Interested Party Contribution. Interested parties are the sellers, real estate agents, builders, developers, lenders, loan originators "or other parties with an interest in the transaction."

The same handbook section lets interested parties contribute up to 6 percent of the sales price toward your origination fees, other closing costs, prepaid items and discount points. The 6 percent also has to hold any interest rate buydown they pay for and any upfront mortgage insurance premium they pay.

A contribution turns into an inducement at two points. The handbook says contributions "that exceed actual origination fees, other closing costs, prepaid items, and Discount Points are considered an inducement to purchase." Contributions "exceeding 6 percent" are treated the same way. Either way, the excess comes off the price before your loan is figured.

Two kinds of money are left outside the 6 percent. Credits from your lender at the rate you choose are excluded, as long as the lender is not also the seller, an agent, the builder or the developer. A seller paying the real estate commissions they typically pay under local or state law or custom is not counted as a contribution at all. Interested party money also cannot be used for the minimum investment FHA requires you to make yourself.

How seller concessions work covers the price-versus-credit strategy, and whether the seller can pay your closing costs explains how the caps work by program. Using a seller credit for cash to close or a rate buydown shows how to find your own break-even.

Your current home's commission, early move-in and furniture

The commission on the home you are selling. It counts as an inducement when the seller agrees to pay part of the commission on the home you are selling. There is a second version too, and it needs three things at once. You pay no commission when you sell, the same broker or agent is involved in both sales, and the seller pays a commission on your purchase "that exceeds what is typical for the area."

Living in the home before closing. A sales contract that lets you live there rent-free is an inducement. So is an agreement to rent it "at a rental amount greater than 10 percent below the Appraiser's estimate of fair market rent." The inducement amount is the difference between the rent you pay and the appraiser's fair market rent, prorated over the time between signing the contract and closing the sale. The handbook makes an exception when a builder misses an agreed delivery date and lets you live in another unit for less until construction is finished.

If you are renting from a relative and buying from them, the family exception may apply, and buying from a family member or business partner with FHA explains how that exception works.

Furniture you buy from the seller separately. The handbook counts Personal Property that you agree to pay for separately as part of the total cash you bring to closing. So if you agree to pay the seller $2,000 for the dining set, that $2,000 is part of your cash to close.

How to write an FHA offer so the seller's help reaches you

1. Before you write the offer, it helps to put each extra into one of three groups. The first is closing costs and prepaid items, within the 6 percent and within what they will actually cost. The second is the household items in the carve-out. The third is everything else, and it comes off the price.

2. You will usually do better asking for a replacement than an allowance. If the dishwasher is failing, the stronger request is that the seller replace it before closing. A cash allowance toward a new one lands in the third group.

3. You can weigh a lower price against an allowance in the third group. A $3,000 decorating allowance and a $3,000 price reduction produce the same Adjusted Value, and therefore the same maximum loan. The price reduction also leaves the contract price lower, with no allowance to document.

4. You want the closing cost credit at or under your estimated costs. I can price your closing costs and prepaid items before you write the number into the offer, so the credit you ask for is one the file can use in full.

5. I'd like to see any repair request before you sign an amendment. Repair allowances are on the inducement list. Reading your home inspection report explains how to build your follow-up list, and I'd like to see the exact wording of any repair arrangement or credit before you rely on it.

The handbook also has the lender record every contribution on the sales contract or another legally binding document, on FHA's form HUD-92900-LT and on the Closing Disclosure. If something other than the sales contract is used, the appraiser gets a copy too.

Common mistakes with seller extras on an FHA purchase

Turning a replacement into a cash allowance. Replacing the refrigerator, the carpet or the window treatments is protected only when it happens before closing with no cash to you. The same help written as a check lands in the third group and comes off the price.

Asking for a closing cost credit bigger than your costs. The amount past your actual costs is an inducement, so it comes off the price instead of reaching you.

Folding the furniture into the price of the home. Furniture, the grill, a golf cart or anything else movable that the seller includes in the price is Personal Property, and its value comes off the price.

An illustration

Numbers below are made up to show the mechanism. You have a $300,000 contract on an FHA purchase, the home appraises at $305,000, and your file is eligible for FHA's maximum purchase financing, which the handbook's loan-to-value section sets at 96.5 percent of the Adjusted Value. The seller has offered a $3,000 paint allowance.

Contract price                              $  300,000
Less paint allowance (an inducement)           -3,000
                                            ----------
Purchase price less inducements             $  297,000
Appraised value                             $  305,000
Adjusted Value (the lesser of the two)      $  297,000
Maximum base loan at 96.5 percent           $  286,605
Contract price minus base loan              $   13,395

Without the allowance, the Adjusted Value would be the full $300,000 and the maximum base loan would be $289,500, leaving a $10,500 gap between price and loan. The allowance takes $2,895 off your loan and adds the same $2,895 to the gap you cover.

Now say the seller drops the price to $297,000 instead and offers no allowance. The Adjusted Value is $297,000 again and the maximum base loan is the same $286,605, so FHA treats the price cut and the allowance the same way.

The washer and dryer from the Saturday text, written into the contract where that is customary, leave every line of that tape alone, and so does a refrigerator the seller installs before closing. These figures are the base loan before any upfront mortgage insurance premium, which the handbook allows to be financed on top of the base amount.

Where to start

Once you have a contract in mind, you can see FHA rates and closing costs for your own scenario before you settle on how much of a credit to ask for. You will see several options on one sheet, and you can choose the option that works best for you. How FHA loans work covers the rest of the program.

You are also welcome to call me with the seller's offer in front of you. We can sort each extra into its group before you sign anything.

Nothing here is a loan approval, a denial, a commitment to lend, or legal advice. No letter from anyone is a loan commitment, and final approval depends on the property, the appraisal and full underwriting.

Common questions

Can the seller pay for my moving costs on an FHA loan?

The seller can offer it, and FHA counts it as an inducement to purchase. Moving costs are on the handbook's list by name, so the amount comes off the purchase price before the loan-to-value percentage is applied, and your maximum loan can shrink.

Can a seller give me a repair credit on an FHA loan?

A repair allowance is on FHA's list of inducements to purchase, so the amount reduces the purchase price dollar for dollar when the lender figures your Adjusted Value. Your maximum loan can go down with it. A seller completing a repair before closing is a different arrangement, and the exact wording of the proposal is worth reviewing with me before you sign the amendment.

Can the seller leave the washer, dryer and refrigerator on an FHA loan?

Yes. FHA's handbook says including a range, refrigerator, dishwasher, washer, dryer, carpeting or window treatment in the sales agreement is not an inducement when including that item is customary for the area. The seller can also replace any of those items before closing, as long as no cash allowance is given to you for it.

What happens if the seller credit is more than my closing costs on an FHA loan?

The part of the credit that exceeds your actual origination fees, other closing costs, prepaid items and discount points is treated as an inducement to purchase. So is any part over 6 percent of the sales price. That excess comes off the purchase price before FHA figures the Adjusted Value, so your maximum loan can drop by the loan-to-value share of it.

Can I rent the home from the seller before closing on an FHA loan?

You can, and the rent matters. Living there rent-free, or at a rent more than 10 percent below the appraiser's estimate of fair market rent, is an inducement to purchase. Family members who meet FHA's identity-of-interest exception are treated differently.