February 1, 2016
There are many rules for FHA home loans that govern what buyers and sellers can and cannot do. For example, the borrower must make a minimum down payment, and the source funds from that down payment cannot come from credit card cash advances or payday loans. But there are rules for the seller (and interested third parties) as well.
Did you know FHA loan rules govern what a seller can and cannot contribute towards the purchase of the property? In some cases there are contributions that are permitted but only within certain limits.
From HUD 4000.1, we learn the following:
“Interested Parties may contribute up to 6 percent of the sales price toward the Borrowers origination fees, other closing costs and discount points. The 6 percent limit also includes:
–Interested 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 UFMIP.”
HUD 4000.1 says, “Interested Party Contributions that exceed actual origination fees, other closing costs, and discount points are considered an inducement to purchase. Interested Party Contributions exceeding 6 percent are considered an inducement to purchase.”
This passage in HUD 4000.1 adds that certain expenses are not considered an inducement to purchase; “Payment of real estate agent commissions or fees, typically paid by the seller under local or state law, or local custom, is not considered an Interested Party Contribution.
What is an inducement to purchase? It’s defined as “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.”
It’s easy to see that a dollar-for-dollar reduction in the purchase price would not be desirable. Even if it IS something that the buyer and seller agree upon, one thing is very important for borrowers to keep in mind when considering any concession a seller might make, or a contribution toward the purchase–such contributions cannot be considered part of the down payment. The borrower’s down payment is required above and beyond any closing costs or other expenses related to buying the home.
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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