June 13, 2023
One common question about FHA loans involves whether the seller can pay some of the expenses of the borrower’s FHA loan as a motivation to purchase.
Can the seller pay closing costs, offer to supply appliances, or add other incentives to the sales agreement?
According to FHA loan rules in the FHA Lender’s Handbook, the answer is yes–but with limitations.
According to HUD, “Certain expenses” paid by the seller (or other “interested third parties”) on behalf of the borrower are considered “inducements to purchase” and result in a dollar-for-dollar reduction to the lesser of the sales price or appraised value of the property before applying the appropriate loan-to-value (LTV) factor.
That said, sellers can contribute up to six percent of the sales price without a penalty. They can also offer the actual cost of certain expenses and even purchase discount points on behalf of the borrower.
But in some cases, the seller cannot contribute–or can’t contribute beyond a set limit–without a penalty that results in a direct reduction in the FHA loan amount for the borrower.
These expenses that will result in a dollar-for-dollar reduction in the FHA loan amount include:
• Contributions exceeding 6% of the sales price
• Contributions exceeding the actual cost of prepaid expenses, discount points, and other financing concessions
• Decorating allowances
• Repair allowances
• Moving costs
FHA loan rules also say you are subject to a similar dollar-for-dollar reduction in the loan when there are excess rent credits or gif funds that do not meet the requirements of the FHA Lender’s Handbook
Speak to a loan officer about the FHA requirements in this area or a definition of “gift funds” as described by the FHA.
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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