March 9, 2015
A reader asks., “I saw a listing agent who stated in an MLS listing that the seller can only contribute up to 1% of sales price to an FHA qualified buyer’s closing costs. (She was implying not to ask for over 1% seller concession because of this FHA requirement). Is that correct? On your site I read that figure to be a maximum of 6%. Can you clarify please. The home is in Apache Junction, AZ (Phoenix suburb and county of Maricopa).”
FHA loan rules state that any seller concession that exceeds six percent is considered an inducement to purchase and will result in a dollar-for-dollar reduction in the loan amount.
This is true for all states, not just the one in the reader question, but it is important to point out that if state law or lender requirements prevents a seller concession above a certain amount, but below six percent, there may be an additional consideration.
FHA loan rules do not override state or federal laws, but with that in mind, let’s review what HUD 4155.1 Chapter Two Section A specifically says about seller concessions and other items that could result in a reduction in the FHA loan amount:
“Certain expenses paid by the seller and/or another interested third party 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. These expenses 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, and
• other costs as determined by the appropriate Homeownership Center (HOC).
As you can see, a variety of third-party contributions to the sale might result in a reduction in the loan amount according to FHA loan rules, but state law may also have a say in what happens. Contact your lender or the FHA for additional clarification on what may apply in your circumstances.
Do you have questions about FHA home loans? Ask us in the comments section. All comments are held for review prior to posting. Your question/comment may be delayed until it can be reviewed.
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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