April 10, 2017
A reader asks a question about seller contributions on an FHA mortgage loan. “What is included in seller contributions with a max of 6%?”
The question refers to something informally known as the “six percent rule” on FHA mortgages, which limits the contributions of an “interested party” to six percent of the sale price of the home. This rule is found on page 232 of HUD 4000.1, which defines both interested parties and their contributions to the sale as follows:
“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.”
What are the FHA loan rules in this area? Page 232 states, “Interested Parties may contribute up to 6 percent of the sales price toward the Borrowers origination fees, other closing costs and discount points.”
Those contributions may include the following:
– 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 Up Front Mortgage Insurance Premium.
FHA loan rules exclude some fees or expenses from this six percent rule. “Payment of real estate agent commissions or fees, typically paid by the seller under local or state law, or local custom, is not considered an Interested Party Contribution. The satisfaction of a PACE lien or obligation against the Property by the property owner is not considered an Interested Party Contribution.”
Lender standards and state law may also have a say in how or if any/all of the above are handled/permitted. Additionally, there are FHA loan requirements about the nature of such contributions-they cannot exceed the actual cost of services or fees. From HUD 4000.1:
“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.”
Furthermore, no contribution of this nature may be used to help the borrower with making the minimum required down payment.
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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