Remaining Buyer Credits for FHA Principal Loan Paydown

[Matthew MacDonald]

I'm in the process of buying an SFR in San Diego, CA with an FHA loan (3.5% down payment, 5/1 ARM). The plan is to live in the house while we add on, remodel, etc. After a year we will refinance the FHA loan into a conventional loan and rent the house out.

I received $5,000 in credits from the Seller, and $1750 from my real estate agent.  My closing costs are completely covered now and I have roughly $1200 leftover from the credits. My mortgage broker has said that I can only use the $1200 to buy down my interest rate ( I don't believe him).  I really do not want to buy down the rate as the savings will not be realized since I plan to refinance so quickly.  

My question is if on an FHA loan you can use the credits towards the principal balance rather than buying down the rate?