March 20, 2015
A reader asks, “Is the seller of a home to a buyer that is financing with a FHA loan required to pay the buyers closing costs?”
FHA loan rules do not say the seller is required to pay closing costs on behalf of the borrower; in any case the seller’s contribution to the sale whether that is in the form of paying closing costs or other incentives is limited to six percent of the sales price of the property.
Here’s a quote from the HUD booklet titled, “Shopping For Your Home Loan” which includes the following under Settlement Costs:
“You can negotiate which settlement costs you will pay and which will be paid by the seller. The seller may contribute a lump sum amount or may agree to pay for specific items on your behalf.”
With regard to FHA home loans specifically, the FHA and HUD issued a mortgagee letter in 2005 (HUDNo. 2005-02) which explained the rules on seller concessions, which can include seller-paid closing costs. The mortgagee letter states:
“In accordance with HUD Handbook 4155.1 Rev-5, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties”, Chapter 1 section 2 (1-7A), contributions from sellers or other interested third parties to the transaction that exceed six (6) percent of the sales price or other financing concessions are to be treated as inducements to purchase, thereby reducing the amount of the mortgage. Each dollar exceeding the six percent limit must be subtracted from the property’s sale price before applying the appropriate loan to value (LTV) ratio.”
Sellers and buyers negotiate any such contributions.
Do you have questions about FHA home loans or refinance loans? Ask us in the comments section. All comments are held for review before appearing on the site.
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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