What Are FHA 'Allowable' Closing Costs?
When you buy a home, the purchase price is only part of the story. You also have 'closing costs', which are fees for the services required to finalize the mortgage and transfer the property. For FHA loans, these costs typically range from 2% to 6% of the loan amount. The data, information, or policy mentioned here may vary over time. The good news is that the Federal Housing Administration (FHA) allows the seller to contribute money toward these expenses, known as seller concessions or seller credits.
However, the seller can only pay for specific, FHA-approved costs. These are legitimate fees directly associated with the loan and property transfer. They cannot simply give you cash back.
FHA-allowable closing costs include:
- Loan Origination Fee: The lender's charge for processing your loan application.
- Appraisal Fee: The cost for a licensed appraiser to determine the home's market value.
- Credit Report Fee: The cost for the lender to pull your credit history.
- Title Insurance and Examination Fees: Costs to ensure the property's title is clear of any liens or claims.
- Attorney Fees: If an attorney is used for closing.
- Inspection Fees: Including pest inspections or home inspections required by the lender or desired by the buyer.
- Recording Fees: County fees to record the sale and mortgage.
- Prepaid Items: These include expenses you pay at closing for costs you'll owe in the future. This includes your first year of homeowner's insurance premiums and property taxes placed into an escrow account.
- Discount Points: Fees paid directly to the lender at closing in exchange for a lower interest rate.
Essentially, if it's a standard and customary fee required to close the loan, the FHA generally permits the seller to pay for it on your behalf. The data, information, or policy mentioned here may vary over time.
The Maximum Seller Contribution for FHA Loans in Nevada
This is a critical rule to understand. For any FHA-insured loan in the United States, including Nevada, the maximum a seller can contribute toward the buyer's closing costs is 6% of the sales price. The data, information, or policy mentioned here may vary over time. It is crucial to note that this is a cap, not an entitlement. The actual amount is fully negotiable and must be written into the purchase contract.
Let's look at a practical example in the Las Vegas market:
- Home Sales Price: $425,000
- FHA Maximum Seller Contribution: $425,000 x 6% = $25,500
This means the seller could contribute up to $25,500 to cover your allowable closing costs. In most cases, you won't need the full 6%. A typical request is for 2-3% of the sales price. Your loan officer is the best person to give you an accurate estimate of your total closing costs so you know exactly how much to ask for.
How to Correctly Write an Offer with Seller Concessions
Asking for seller concessions isn't as simple as subtracting the amount from your offer. To make it appealing to the seller, you need to structure it so their net proceeds are not negatively affected. This often involves 'grossing up' the offer price.
Structuring the Purchase Price
Imagine a home is listed for $400,000 in Henderson. Your loan officer tells you that you'll need approximately $12,000 for closing costs. You don't have this cash available.
- Incorrect Approach: Offer $400,000 and ask for a $12,000 credit. The seller would only net $388,000, which is $12,000 less than their asking price. They are likely to reject this or counter.
- Correct Approach: Offer $412,000 and ask for a $12,000 credit back for closing costs. If the seller accepts, they still net their target of $400,000. You are essentially financing the closing costs into the slightly higher loan amount.
This strategy makes the offer far more palatable to the seller, as their bottom line remains the same. The major contingency for this approach is that the home must appraise for the higher sales price of $412,000.
Verbiage for the Purchase Agreement
Your real estate agent will handle the official contract language, but it will look something like this:
'Seller agrees to credit Buyer $12,000 (twelve thousand dollars) at closing to be used toward Buyer's recurring and non-recurring closing costs, prepaid items, and/or discount points.'
This language is clear, specific, and covers all categories of allowable costs, providing flexibility when the final numbers are calculated.
Will Asking for Credits Make My Offer Less Competitive in Las Vegas?
In a competitive real estate market like Las Vegas or Reno, any added complexity can make an offer seem less attractive. An offer with seller concessions is inherently more complicated than a straightforward cash offer or a conventional loan with a large down payment.
A seller might perceive an offer with concessions as weaker for two reasons:
- Financial Strength: It signals that the buyer may be tight on cash, which could be a red flag for some sellers.
- Appraisal Risk: As shown in the example above, a 'grossed-up' offer relies on the property appraising for the higher price. If it doesn't, the deal could face delays or fall apart completely.
However, this doesn't mean you shouldn't ask. In a balanced or buyer's market, seller concessions are common. In a seller's market, the key is to make the rest of your offer as strong as possible: get fully pre-approved, offer a fair price, be flexible on the closing date, and minimize other contingencies.
Is It Better to Ask for Credits or Offer a Lower Price?
This decision depends entirely on your financial situation, specifically your available cash.
Scenario 1: Offering a Lower Price
Let's say the home is listed for $400,000 and your closing costs are $10,000.
- You offer $390,000 with no concessions.
- Pro: This is a clean, simple offer that is very attractive to sellers. Your final loan amount and monthly payment will be lower.
- Con: This does nothing to solve the immediate problem. You still need to bring your 3.5% down payment plus the $10,000 in closing costs in cash to the closing table.
Scenario 2: Asking for Seller Credits
Using the same scenario:
- You offer $400,000 and ask for a $10,000 seller credit.
- Pro: This directly solves your cash-to-close problem. You only need to bring your 3.5% down payment.
- Con: Your loan amount is $10,000 higher, leading to a slightly larger monthly mortgage payment. The home must appraise for $400,000.
The Verdict: If cash-on-hand is your primary obstacle, asking for seller credits is the superior strategy. It's a tool designed specifically to overcome that hurdle.
Can I Combine Seller Credits with Nevada's Down Payment Assistance?
Yes, and this is a powerful combination for first-time homebuyers in Nevada. State and local Down Payment Assistance (DPA) programs, like those offered by the Nevada Housing Division, are designed to help with the minimum 3.5% down payment required by FHA.
Here’s how the strategy works:
- Down Payment: You secure a DPA grant or silent second mortgage to cover most or all of your 3.5% down payment.
- Closing Costs: You negotiate a seller concession to cover your closing costs and prepaid items.
By stacking these two benefits, a Nevada homebuyer can potentially purchase a home with very little out-of-pocket cash. This requires a lender who is an expert in both FHA guidelines and the specific DPA programs available in Nevada, as the rules must be followed precisely. The data, information, or policy mentioned here may vary over time.
What Happens if the FHA Appraisal Comes in Low?
This is the biggest risk when you increase an offer price to cover concessions. An FHA appraiser will determine the home's value, and the FHA will only insure a loan up to that appraised value.
Let's revisit our example: You offered $412,000 with a $12,000 concession, but the FHA appraisal comes in at only $405,000.
You now have a problem. The lender will only finance based on the $405,000 value. Your options are:
- Seller Reduces Price: The seller can agree to lower the sales price to $405,000. You would likely need to renegotiate the seller concession as well.
- Buyer Pays the Difference: You could pay the $7,000 difference in cash, but this defeats the purpose of asking for concessions in the first place.
- Meet in the Middle: You and the seller could negotiate a solution somewhere in between.
- Cancel the Contract: If your purchase agreement has an appraisal contingency, you can walk away from the deal and have your earnest money deposit returned.
It's important to know that an FHA appraisal value stays with the property's case number for 120 days, which can impact any subsequent FHA buyers if your deal falls through. The data, information, or policy mentioned here may vary over time.
Are There 'No Closing Cost' FHA Loans?
While you may see 'no closing cost' loans advertised, it's important to understand there is no such thing as a truly free mortgage. The costs are still paid, just in a different way.
Typically, a 'no closing cost' loan means the lender is giving you a credit to cover the fees. In exchange for this lender credit, you are charged a significantly higher interest rate for the entire life of the loan. Over 30 years, this will cost you far more than paying the closing costs upfront or negotiating a seller credit.
Seller concessions are a much more transparent and cost-effective way to get your closing costs covered. You get the help you need without committing to a permanently higher interest rate. It's a one-time negotiation for a one-time set of fees, which is the most financially sound approach. If you're considering an FHA loan in Nevada and need to minimize your out-of-pocket costs, understanding seller concessions is the first step. For a clear calculation of how much you can ask for and how to structure your offer effectively, speak with a mortgage expert who specializes in FHA financing and the Nevada market.
Ready to put these strategies into action? Our FHA specialists can guide you through structuring a winning offer that minimizes your upfront costs. Apply now to get a personalized plan for your Nevada home purchase.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
