August 15, 2014
There are plenty of expenses related to buying a home that house hunters need to save up and/or budget for–loan fees, appraisal expenses, certain types of insurance, even moving expenses should be factored into the equation. But can the seller pay some of these costs on an FHA loan to make the sale more attractive to the borrower? This is a common question among many first-time home buyers and sellers.
The answer is yes–but on a limited basis as defined in the FHA loan rulebook. FHA loan rules don’t allow sellers to contribute more than a total of six percent of the sales price of the home without there being a dollar-for-dollar reduction in the loan amount based on the contribution above that six percent.
What’s more, FHA loan rules also say some expenses cannot be paid by the seller without this dollar-for-dollar reduction.
Those expenses include moving costs, something described in the FHA loan rulebooks as “repair allowances”, and redecorating. Also, FHA loan rules do permit the seller to pay for discount points and similar expenses, but only their actual cost. If your discount points cost X amount of dollars and the seller overpays for that transaction, the dollar-for-dollar reduction in the loan amount applies for the amount overpaid.
In some cases, and this can be affected by state law, the addition of personal property to the transaction may also trigger the dollar-for-dollar reduction. According to HUD 4155.1, Chapter Two, “Personal property given by a seller and/or another interested third party to consummate the sale of a property results in a reduction in the mortgage amount. The value of the item(s) must be deducted from the lesser of the sales price or appraised value of the property before applying the LTV factor.”
Chapter Two adds, “Depending on local custom or law, certain items may be considered part of the real estate transaction with no adjustment to the sales price or appraised value.”
Knowing how state law affects your FHA loan transaction in this area can be key–speak to your loan officer about your needs or questions you may have about what typically affects the mortgage loan amount and what may not.
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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