October 29, 2014
A reader asks, “What costs will a seller incur if a buyer is using an FHA loan to purchase?”
That is a difficult question to answer for a variety of reasons–state real estate law, lender requirements and FHA loan rules all have a say in the closing costs of a FHA home loan. There’s no itemized list of seller costs listed in the FHA loan rulebook, HUD 4155.1, but the FHA does make a list of certain costs and/or seller contributions to the sale that are and are not permitted.
For example, the borrower is not to be charged for pest/termite inspections. The borrower can’t pay for the lender’s legal counsel, and the FHA has a set of regulations that dictate how much the seller can contribute toward the sale of the property.
HUD 4155.1 Chapter Two has a section covering this issue, which states:
“The seller and/or third party may contribute up to six percent of the lesser of the property’s sales price or the appraised value toward the buyer’s closing costs, prepaid expenses, discount points and other financing concessions.
The six percent limit also includes
• third 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 upfront mortgage insurance premium (UFMIP).
Note: Contributions exceeding six percent are considered inducements to purchase.”
An inducement to purchase results in the loan amount being lowered dollar-for-dollar for any amount above the six percent limit.
Seller concessions and other seller costs may be subject to negotiation in certain cases between buyer and seller. If a seller isn’t sure how to proceed with an FHA loan, it’s a good idea to ask the advice of a real estate agent or a loan officer to learn what is permitted and what is not if there’s any doubt.
Do you have questions about FHA home loans? Ask us in the comments section.
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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