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?

no unfortunately, they're lost...:( 

can you ask for a lower price with less seller contribution?  stupid question maybe as i'm sure you've already asked. 

I think your agent is correct.

I also tried to have them apply the credits to more impound accounts, but that is also a no-go.  It seems that since I received credits from the Seller I will not be able to use any remaining credits towards a paydown of the principal balance.  I will just have to live with buying down the interest rate for now.  Not the exact outcome I wanted, but at least all of my closing costs are covered.  I will close on the house tomorrow and can then focus on getting it ready to rent out.