February 2, 2016
In our last blog post, we discussed FHA loan rules found in HUD 4000.1 on inducements to purchase and what happens if a seller or other interested third party contributes more toward closing costs or other allowed expenses than is allowed by FHA mortgage loan rules.
According to HUD 4000.1, “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.”
This information is helpful–but what constitutes an inducement to purchase?
HUD 4000.1 lists them–they include but are NOT limited to the following:
–contributions exceeding 6 percent of the purchase price;
–contributions exceeding the origination fees, other closing costs and discount points;
–decorating allowances;
–repair allowances;
–excess rent credit;
–moving costs;
–paying off consumer debt;
–Personal Property;
–sales commission on the Borrowers present residence; and
–below-market rent, except for Borrowers who meet the Identity-of-Interest exception for Family Members
The lender is required to verify and/or track many different types of funds including down payment money and seller or other third party contributions to the sale. Why all the scrutiny? Because certain exceptions apply for different types of FHA loan rules and the lender needs to keep the details straight to determine which exceptions may apply and which ones don’t.
And yes, there is a set of exceptions to certain elements of the inducement to purchase rule. For example, notice the Personal Property item in the list above? HUD 4000.1 states of personal property:
“Replacement of existing Personal Property items listed below are not considered an inducement to purchase, provided the replacement is made prior to settlement and no cash allowance is given to the Borrower. The inclusion of the items below in the sales agreement is also not considered an inducement to purchase if inclusion of the item is customary for the area:
–range
–refrigerator
–dishwasher
–washer
–dryer
–carpeting
–window treatment
–other items determined appropriate by the HOC”
This is good to know when trying to determine what may or may not count as an inducement to purchase. Another area that’s important to keep in mind with this issue? Commissions associated with transaction. From HUD 4000.1:
“An inducement to purchase exists when the seller and/or Interested Party agrees to pay any portion of the Borrowers sales commission on the sale of the Borrowers present residence. An inducement to purchase also exists when a Borrower is not paying a real estate commission on the sale of their present residence, and the same real estate broker or agent is involved in both transactions, and the seller is paying a real estate commission on the Property being purchased by the Borrower that exceeds what is typical for the area.”
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
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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