February 16, 2022
Do you know about one of the secrets of managing your closing costs for an FHA home loan? We’re talking specifically about seller contributions to your closing costs for your FHA purchase loan–what the seller is permitted to contribute under the rules for your FHA mortgage.
Buying a home requires more cash than some borrowers expect–at first.
There are appraisals and home inspections to pay for, sometimes a pest inspection may be needed, and you may also have to pay or anticipate paying some taxes, compliance inspection fees, and more.
Negotiating with the seller to pay a portion of your closing costs is (believe it or not) fairly common in the mortgage industry.
Individual sellers and individual house hunters alike may need some time to get used to this idea but try doing the math on the amount of allowable seller concessions and you’ll see this is an option worth overcoming a typical fear of bargaining for.
What do we mean? How much is the seller allowed to contribute? FHA loan rules cap seller contributions toward your closing costs at six percent of the price of the home. That might not sound like a lot. At first. Let’s do the math.
Six percent of a home’s sale price at $133,000 is $7,980. Who wouldn’t choose to haggle a bit if it meant saving nearly eight thousand dollars?
When you are worrying over the other expenses of the mortgage, that money could come in handy at closing time. Especially if you want to make a larger down payment–freeing up that cash might make a huge difference in that respect.
What’s the catch?
There isn’t one, really, but you should know that the seller is strictly limited to that six percent limit. What happens if the seller gives you more?
There ARE consequences, but in this case, it’s punitive but not prohibitive. Basically, for any amount above the six percent cap, the lender is simply required to reduce the amount of your home loan by the amount that exceeds the six percent.
No, that is NOT ideal. But it’s not the end of the world, either–your mortgage is not stopped dead in its’ tracks over this issue the way it might be if there is a problem with the appraisal that cannot be readily addressed. It is smart to be mindful of the cap and avoid exceeding it.
You want your home loan process to be as simple and as straightforward as possible.
In addition to using seller contributions to your closing costs, if you apply for down payment assistance through a state or local program you could find yourself being relieved of even more up-front costs for the mortgage.
Unlike the FHA mortgage loan program itself, some down payment assistance programs favor first-time borrowers and those who have not owned a home in three years or more. Be mindful of any such requirements when applying–you’ll be glad you did.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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