April 24, 2014
The FHA loan rulebook, HUD 4155.1, has rules about how much a seller or other third party can contribute to the closing costs of a borrower purchasing a property using an FHA mortgage. According to the rules, it is possible for a seller to contribute toward closing costs, but there are limits.
“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.”
Six percent of the sales price or appraised value (whichever amount is lower) also includes the following:
- 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.
It’s important to be aware of that last line, which warns (in so many words) about “inducements to purchase”. The reason for this warning? An inducement to purchase will 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.”
And there are other items that could be paid for by the seller that are considered inducements to purchase. They include:
- 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.
HUD 4155.1 also points out that, “A dollar-for-dollar sales price reduction is also required for
• excess rent credit, as described in HUD 4155.1 5.B.6.f, and
• gift funds not meeting the requirements described in HUD 4155.1 5.B.5.”
Talk to your loan officer if you have concerns about an aspect of your FHA loan closing cost payment or other areas that may become an issue related to inducements to purchase.
Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.
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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