June 14, 2011
In a tough housing market, house sellers often must include incentives to make their property more attractive to a borrower.
In other words, the seller isn’t just putting the home up for sale, there are a few bonuses thrown into the deal such as helping with the cost of pre-paid expenses, paying discount points or other things. Some sellers will throw in some appliances as an incentive, others might offer to furnish a new large screen television, etc.
When it comes to FHA loans, there are limits on how much and how far such incentives can go. The seller is not forbidden to offer any incentives, but there’s a difference between a contribution and what the FHA considers “inducements to purchase”. An inducement to purchase, while not illegal, does result in the FHA lowering the amount of the loan accordingly.
FHA rules state that any seller contribution, or the total of all contributions combined, must not be valued at more than six percent of the sales price of the property. Those which do exceed the six percent rule fall under the following FHA guidelines as posted on the FHA official site:
“Contributions exceeding six percent of the sales price or exceeding the actual cost of prepaid expenses, discounts points, and other financing concessions as well as other inducements to purchase, result in a dollar-for-dollar reduction to the sales price before applying the appropriate LTV ratio.”
FHA rules also require the same dollar-for-dollar reductions to the sales price for any “excess rent credit, as well as for gift funds not meeting the requirements.” When it comes to the seller offering items like televisions, furniture, and similar items, FHA requires a reduction in the mortgage amount and he appraised value of the property before the lender can “apply the Loan To Value ratio”.
But some appliances aren’t lumped into that category. According to the FHA, stoves, refrigerators, washers, dryers and other items are considered part of the home and no adjustment to the price is required. It’s easy to see why a kitchen stove would not be considered an inducement to purchase where a big screen television would be.
In cases where there’s a question over whether a particular appliance or incentive is considered part of the “six percent” rule, an inducement to purchase or one that, like a stove or washing machine, is considered part of the real estate deal, contact the FHA for advice.
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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