August 20, 2019
First-time borrowers have many questions about the FHA home loan process including the subjects of down payments, seller contributions, and down payment assistance.
Borrowers need to know that there are certain federal laws that require FHA home loans to limit the contribution of any third party with a financial stake in the outcome of the mortgage, and it’s good to know how these rules work.
Seller Contributions Versus Seller Downpayment Assistance
FHA loan rules state clearly that the seller of the home may not contribute funds toward the borrower’s down payment. This is expressly forbidden in the FHA loan rulebook, HUD 4000.1.
However, sellers are permitted to contribute toward the borrower’s closing costs, capped at a maximum of six percent of the adjusted price of the property.
Contributions in excess of the six percent rule are likely to be termed an inducement to purchase, which must by law result in a dollar-for-dollar reduction in the loan amount for sums above six percent. And that is not just limited to cash contributions.
FHA Loan Rules In HUD 4000.1 On Inducements To Purchase
HUD 4000.1 states, ” Inducements to Purchase refer to certain expenses paid by the seller and/or another Interested Party on behalf of the Borrower and result in a dollar-for-dollar reduction to the purchase price when computing the Adjusted Value of the Property before applying the appropriate Loan-to-Value (LTV) percentage.”
These inducements include contributions “exceeding the origination fees, other closing costs and discount points”, decorating allowances,
Paying off consumer debt or paying the sales commission on the Borrower’s present residence are also seen as inducements to purchase.
In general, no cash must come back to the borrower as the result of a seller contribution; FHA loan rules do not permit cash back to the borrower except as a legitimate refund of something paid up front but later financed into the home loan.
As a general rule, first-time home buyers should not expect the seller or the lender to provide any down payment funds; no party to the transaction with a financial stake in the outcome of the loan is permitted to do so.
Down Payment Assistance
You may be interested in down payment assistance on an FHA mortgage, which is possible, but only as provided by a third party not involved in the FHA loan transaction. There are resources you can use to find a down payment assistance program in your area. These programs are sometimes known as down payment grants or home buyer grants.
Some down payment assistance may require you to be a first-time home buyer, some programs may be need-based and feature income requirements. Others are simply available for any home owner to use under the right circumstances (restrictions on the nature of the property you purchase may apply, as well as lender standards and state law).
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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