FHA Seller Concessions: How Much Sellers Can Contribute and What's Allowed

The FHA is known for its low down payment requirements, but understanding the minimum required, acceptable sources for funds, and what sources are prohibited helps you plan your homebuying finances effectively. This article explains FHA down payment requirements and acceptable sources based on official FHA Handbook 4000.1 standards.

FHA Down Payment Basics

What Is Down Payment?

Definition: The amount of cash the borrower personally contributes to the purchase price, not financed by the mortgage.

Example:

Purchase price: $300,000
Down payment: $10,500 (3.5%)
FHA loan amount: $289,500
Total: $300,000

Minimum Required Investment (MRI)

FHA terminology: The FHA calls down payment the "Minimum Required Investment" or MRI.

Calculation: At least 3.5% of the Adjusted Property Value (purchase price in most cases)

FHA's Advantage: Low Down Payment

Compared to other programs:

FHA: 3.5% minimum down payment
Conventional (good credit): 5-20% typically
VA: 0% down payment (for veterans)
USDA: 0% down payment (for rural properties)

Minimum Down Payment Amounts by Property Type

One- to Two-Unit Properties

Minimum down payment: 3.5% of adjusted property value

Example:

Purchase price: $300,000
Minimum down payment: $10,500
Maximum loan amount: $289,500

Three- to Four-Unit Properties

Minimum down payment: 3.5% of adjusted property value

Note: Same 3.5% as one- to two-unit properties

Manufactured Homes

Minimum down payment: 3.5% of adjusted property value

Note: Same 3.5% as site-built properties

Acceptable Sources for Down Payment

Borrower's Own Funds

Most straightforward source:

Money in checking account
Money in savings account
Funds borrowed against acceptable collateral
Funds from sale of personal property
Funds from sale of real property

Documentation required:

Bank statements
Proof of deposits
Verification of account balance

Family Gifts

Who can give:

Parent
Sibling
Grandparent
In-law relationships
Other family members

Requirements:

Must be a gift (no repayment required)
Donor must have legal relationship or "clearly defined and documented interest"
Signed gift letter required
Funds must come from acceptable source (not borrowed from seller or lender)

What must be documented:

Gift letter signed by donor and borrower
Donor's name, address, telephone number
Relationship to borrower
Dollar amount of gift
Statement that no repayment is required
Proof of funds transfer (check, wire confirmation, etc.)

Critical rule: Funds must be documented as being in donor's account, showing ability to give

Employer Assistance

What qualifies:

Relocation assistance
Housing assistance program
Down payment assistance from employer
Moving expense assistance

Does NOT include:

Secondary financing from employer
Salary advances (not acceptable for down payment)

Examples:

Employer relocation package: Yes
Company homebuyer assistance plan: Yes
Employer guaranteeing purchase of old home: Yes
Employer loaning money for down payment: May be acceptable with proper documentation

Documentation required:

Executed agreement from employer
Verification of funds
Details of assistance program
Proof of receipt if assistance is after closing

Retirement Accounts (IRA, 401(k))

Accessible funds:

Borrower may use up to 60% of IRA or 401(k) value
Higher percentage if borrower provides evidence of greater withdrawal ability
Accounts can be: IRA, 401(k), thrift savings plans, Keogh accounts

Important restrictions:

Lender calculates 60% minus penalties and taxes
If borrower can document higher withdrawal percentage, lender allows it
Funds must be liquidated (withdrawn) by closing

Example:

IRA balance: $50,000
60% available: $30,000
Federal tax withdrawal penalty estimate: 30%
Net available: ~$21,000

Documentation required:

Most recent IRA/401(k) statement
Proof of eligibility to withdraw
Terms and conditions for withdrawal
Proof of liquidation (if used for down payment)

Tax and penalty implications:

Borrower responsible for understanding tax consequences
May owe income tax on full withdrawal
May owe 10% early withdrawal penalty if under age 59½
Lender calculates net available after estimated taxes/penalties

Stocks, Bonds, and Investments

Acceptable:

Stocks and mutual funds
Bonds and government securities
Certificate of Deposit (CD)
Money market funds

How value is determined:

Most recent monthly or quarterly statement
If not in brokerage account, current value through Third Party Verification (TPV)
Government savings bonds valued at original purchase price (unless eligible for redemption)

Documentation required:

Most recent account statement
Proof of account ownership
Proof of liquidation (if funds are needed at closing)

Cash Reserves and Savings Accounts

Acceptable:

Checking account balances
Savings account balances
Money market accounts
Certificates of deposit (CDs)

Documentation required:

Recent bank statements (usually last 2 months)
Verification of deposit (VOD) if large deposit
For deposits over 50% of monthly income, explanation of source may be needed

Large deposits: If deposit exceeds 50% of borrower's monthly income, lender may require explanation of source to ensure funds aren't borrowed

Private Savings Clubs

What is it:

Non-traditional savings method
Members pool money for mutual benefit
Members draw funds periodically

FHA acceptance:

Yes, but with specific requirements

Requirements:

Must provide recent account ledgers showing history
Club treasurer must verify club is active
Lender must verify reasonable accumulation of funds
Funds must not be borrowed (must be member's own contributions)

Documentation:

Account ledgers and receipts
Verification letter from club treasurer
Evidence of borrower's participation and contributions

Relocation/Employer Guaranteed Purchase Programs

What it is:

Employer or relocation service guarantees purchase of borrower's previous home
Net proceeds from sale available for new purchase

How it works:

Borrower being transferred
Employer has agreement to buy old home at guaranteed price
Net proceeds (sale price minus liens and costs) available for new down payment

Documentation required:

Executed buyout agreement signed by all parties
Proof of employer responsibility for mortgage debt
Verification of net proceeds from sale

Sale of Personal Property

Acceptable personal property:

Vehicle
Recreational vehicle
Collectibles (coins, stamps)
Jewelry
Artwork
Furniture (if substantial value)

How it's valued:

Lesser of estimated value or actual sales price
If unsold, must be documented through Third Party Verification (TPV)

Documentation:

Proof of sale and proceeds (bill of sale, auction receipt)
If sale is pending, written commitment from buyer

Sale of Real Property

Acceptable:

Net proceeds from sale of real property (existing home, investment property, etc.)
Net proceeds = sale price minus liens and sale costs

Example:

Sale price of old home: $250,000
Outstanding mortgage: $200,000
Closing costs and realtor fees: $15,000
Net proceeds: $35,000 available for down payment

Documentation required:

Fully executed Closing Disclosure from previous sale
Settlement statement showing net proceeds
Verification of funds received

Collateralized Loans

What it is:

Loan secured by borrower's assets
Assets (checking, savings, CDs, stocks) serve as collateral
Can be liquidated to repay loan

Acceptable:

Loan from bank secured by deposit account
Loan secured by stocks/bonds
Loan secured by retirement account

Who can provide:

Independent third party (bank, credit union, lender)
NOT seller, real estate agent, lender making FHA loan, or other interested party

Unacceptable collateralized loans:

Unsecured signature loans
Cash advances on credit cards
Borrowing against household goods/furniture

How it affects DTI:

Lender reduces asset value by loan amount owed
If payment can be made from liquidating asset, may not count toward DTI
Monthly payment counts if expected to be outstanding beyond 10 months

Documentation:

Promissory note showing terms
Account statement showing collateral
Proof of loan proceeds

Nonprofit Down Payment Assistance Programs

What they are:

Charitable organizations providing down payment assistance
Typically target first-time homebuyers or low/moderate-income families

FHA acceptance:

Yes, funds qualify as gifts or grants for down payment

Requirements:

Provider must be 501(c)(3) charitable organization
Must be properly documented as gift
Funds must not require repayment
Cannot be used to pay off debts (only down payment/closing costs)

Verification:

Lender responsible for confirming 501(c)(3) status
Can check IRS Tax Exempt Organization Search

Important note: If organization loses tax-exempt status after gift is made, gift still acceptable if:

Gift was made to borrower
Properly documented
Borrower under contract before tax-exempt status terminated

Government Down Payment Assistance

Eligible programs:

Federal Home Loan Bank (FHLB) Affordable Housing Program (AHP)
State housing finance agency programs
Local government down payment assistance
HUD community development programs

Requirements vary by program:

Income limits (typically for first-time or low/moderate-income buyers)
Property location requirements
Occupancy requirements
Possible restrictions on resale

Documentation:

Proof of grant or assistance award
Terms and conditions of program
Deed restriction or restriction agreement (if applicable)

Rental Income Income (For Down Payment Reserves)

How it works:

Borrower has rental income-producing property
Rental income can help qualify for mortgage
Surplus funds from rental income can be used for reserves (not directly for down payment typically)

Calculation:

Lender uses 75% of gross rental income or actual rental income minus expenses, whichever is less

Sources PROHIBITED for Down Payment

Seller Financing

NOT acceptable:

Seller cannot provide or gift the down payment
Seller cannot cover borrower's down payment costs
Violates FHA rules preventing seller-financed down payments

Exception: Seller may contribute up to 6% of sales price toward closing costs (not down payment)

Other Interested Parties

NOT acceptable for down payment:

Real estate agents/brokers
Lender
Builder/developer (for down payment - can cover closing costs)
Any party financially benefiting from transaction

Borrowed Funds From Unacceptable Sources

NOT acceptable:

Cash advances on credit cards
Unsecured signature loans
Loans from family member (unless properly documented)
Payday loans
Loans from anyone with interest in the transaction

Cash on Hand

NOT acceptable:

Cash without documented source
Unexplained cash withdrawals
Under-the-table cash gifts

Why: FHA requires ability to document source of all funds to prevent fraud and money laundering

Inducements to Purchase

NOT acceptable if transaction involves:

Decorating allowances
Repair allowances beyond normal seller concessions
Excess rent credits
Moving cost assistance
Below-market rent agreements

Rule: Seller contributions beyond 6% of sales price or actual down payment/closing costs are considered inducements

Down Payment Assistance and Secondary Financing

Secondary Financing for Down Payment

What it is:

Second mortgage to help borrower pay down payment
Different from primary FHA mortgage
Subordinated to FHA loan (FHA is first lien)

Who can provide:

Governmental entities (no restrictions)
HOPE grantees (nonprofit organizations)
Family members (with specific conditions)
Private individuals/organizations (with specific conditions)

Restrictions:

Cannot require repayment from seller concessions
Cannot require balloon payment within 10 years
Terms must be clearly documented
Cannot be transferred to another entity after closing

FHA rules:

No maximum Combined Loan-to-Value (CLTV) for government/HOPE loans
Secondary financing counts in debt-to-income calculation if term extends beyond 10 months

Documentation Requirements for Down Payment Funds

General Documentation

Lender must obtain for all down payment sources:

Written verification of funds
Bank statements or account statements
Proof of account ownership
Evidence of funds availability

Source Documentation

For different sources:

Personal savings: Bank statements (last 2 months typically)

Gift:

Signed gift letter
Donor's bank statement showing ability to give
Proof of funds transfer (check, wire, etc.)

Retirement account:

Account statement
Withdrawal eligibility documentation
Proof of liquidation

Stocks/bonds:

Account statement from brokerage
Current value documentation

Employer assistance:

Letter from employer detailing assistance
Verification of funds
Agreement documentation

Real estate sale:

Closing Disclosure
Settlement statement
Bank statement showing receipt

Verification of Deposits

If deposit is large (exceeds 50% of monthly income):

Lender may request explanation of source
Three months of bank statements may be needed
Source of deposits must be documented

Down Payment and Borrower Finances

Down Payment and DTI (Debt-to-Income Ratio)

Important: Down payment funds do NOT count toward debt-to-income ratio calculation

Down payment is separate from:

Income verification
Debt calculation
Payment obligations

Reserves After Down Payment

Definition: Assets remaining after closing (after down payment and closing costs paid)

Required reserves:

One- to two-unit properties: One month's PITI (Principal, Interest, Taxes, Insurance)
Three- to four-unit properties: Three months' PITI

What counts as reserves:

Cash remaining in bank accounts
Stocks/bonds
Retirement account balances (adjusted for taxes/penalties)
Equity in other properties

What does NOT count:

Down payment paid
Closing costs paid
Earnest money (already counted)
Borrowed funds
Gift funds

Down Payment Examples

Example 1: Buyer Using Personal Savings + Gift

Scenario:

Purchase price: $350,000
Minimum down payment required: $12,250 (3.5%)
Borrower's savings: $8,000
Mother's gift: $5,000
Total down payment available: $13,000 ✓

Documentation:

Bank statement showing borrower's $8,000 in checking account
Gift letter from mother
Mother's bank statement showing $5,000 available
Wire or check showing mother's funds transfer

Example 2: Buyer Using Retirement Account + Employer Assistance

Scenario:

Purchase price: $400,000
Minimum down payment: $14,000
401(k) balance: $30,000
60% available: $18,000
After estimated taxes/penalties (30%): ~$12,600
Employer relocation assistance: $3,000
Total down payment: ~$15,600 ✓

Documentation:

401(k) statement
Withdrawal eligibility letter
Proof of liquidation
Employer relocation agreement
Verification of employer funds receipt

Example 3: Buyer Using Collateralized Loan

Scenario:

Purchase price: $300,000
Minimum down payment: $10,500
Savings account: $20,000
Borrows $10,500 against savings account from bank
Net down payment: $10,500 ✓

Documentation:

Savings account statement ($20,000)
Promissory note for $10,500 collateralized loan
Proof of loan proceeds

Key Takeaways for FHA Down Payment

3.5% minimum down payment - Lower than most conventional programs
Personal funds acceptable - Savings, checking accounts, investments
Gifts allowed - From family, employer, charitable organizations with proper documentation
Retirement accounts usable - Up to 60% (or higher with proof) minus penalties/taxes
Employer assistance qualifies - Relocation packages, housing assistance programs
Secondary financing available - Government and nonprofit programs can help with down payment
Seller cannot gift down payment - Violates FHA rules (but can contribute to closing costs)
Documentation critical - All sources must be verified and documented
Reserves required - After down payment, borrower must have reserves remaining
No cash on hand - All funds must be documented and traceable to legitimate source

Conclusion

FHA's 3.5% minimum down payment is one of its biggest advantages for homebuyers, and acceptable sources are numerous—from personal savings and gifts to retirement accounts and employer assistance. The key is ensuring all down payment funds come from permissible sources and are properly documented, with no unexplained cash or contributions from interested parties in the transaction.