July 18, 2016
A reader asks, “Can the buyer use seller assist for the down payment and closing costs? If yes, what is the limit?” This is a more common question than it may seem at first-sellers can and often do contribute toward the closing costs of an FHA loan, but the FHA loan rulebook definitely has some things to say about how much and what kinds of contributions a seller may make.
FHA loan rules governing these contributions are found on page 220 of HUD 4000.1 and cover more than just the seller’s assistance. Any financial help toward the closing costs coming from what the FHA terms “interested parties” is governed by these rules.
To begin with, no one with a financial stake in the outcome of the sale of the property may contribute cash towards the borrower’s down payment. This is not permitted. Interested parties may contribute towards the borrower’s closing costs up to a certain percentage.
So who are these “interested parties”? According to HUD 4000.1, “Interested Parties refer to sellers, real estate agents, builders, developers or other parties with an interest in the transaction.
Interested Party Contribution refers to a payment by an Interested Party, or combination of parties, toward the Borrowers origination fees, other closing costs and discount points”.
When it comes to the actual contributions, HUD 4000.1 states: “Interested Parties may contribute up to 6 percent of the sales price toward the Borrowers origination fees, other closing costs and discount points.”
And how does the FHA define what the borrower may contribute for “other closing costs”?
“Interested Party payment for permanent and temporary interest rate buydowns, and other payment supplements;
–payments of mortgage interest for fixed rate Mortgages;
–Mortgage Payment protection insurance; and
–payment of the UFMIP.”
And HUD 4000.1 also contains provisions in this section for what happens if the interested parties contribute funds that exceed the six percent limit:
“Interested Party Contributions that exceed actual origination fees, other closing costs, and discount points are considered an inducement to purchase. Interested Party Contributions exceeding 6 percent are considered an inducement to purchase.”
An inducement to purchase will result in a dollar-for-dollar reduction in the loan amount for all funds that exceed the limit. We will explore this topic in another blog post.
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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