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FHA Loans: What Costs Can the Seller Pay for the Buyer?

Negotiating isn’t easy, no matter which side of the table you’re sitting on. The buyer wants to get the best deal for money spent, but doesn’t want to make an offer that is too low for fear of scaring off the seller. From the seller’s point of view, getting the most out of a major investment like a house is crucial, but ask too much and the buyer may look elsewhere.

When it comes to buying a home with a FHA guaranteed mortgage, the FHA loan program has some options buyers and sellers alike should consider to make the purchase more attractive.

In the course of buying a home with a FHA-guaranteed mortgage, buyers and sellers can negotiate a sales price, but what if that price is higher than the borrower wants to pay or is higher than the fair market value of the home as stated after the appraisal? The seller can improve his or her position by offering to contribute a percentage of the sales price towards the buyer’s closing costs, discount points or other FHA loan costs.

The FHA and HUD allow this in part because of the flexibility it gives both buyer and seller. If the buyer agrees to the contribution, it can potentially reduce the amount of money the borrower has to pay up front while giving the seller the asking price minus the contribution.

FHA requirements in this area have two important features. The first is that the seller can’t contribute more than six percent of the sales price without affecting the amount of the FHA insured loan. Six percent is the limit; anything more is considered an “inducement to purchase” which forces the FHA to lower the amount of the mortgage accordingly. The regulations are clear; “Each dollar exceeding FHA’s six percent limit must be subtracted from the property’s sales price before applying the LTV ratio.”

The second feature of this is that the seller can only contribute the six percent for actual costs related to closing, interest rate buydowns, discount points or other concessions. In the same way FHA mortgage loan rules are designed to keep the lender from artificially inflating the cost of services, the borrower and seller may not inflate the closing costs, interest rate buydowns or other contributions.

Sellers should take care not to confuse their contribution with other amounts of money they may be required to pay as part of the FHA home loan process. “Fees typically paid by the seller under local or state law, or local custom, such as real estate commissions, charges for pest inspections, fees paid for trustees to release a deed of trust, etc., are not considered contributions.”

2 Responses to FHA Loans: What Costs Can the Seller Pay for the Buyer?

  1. Holly says:

    Where can I find the legal documentation that the seller may contribute up to six percent of the purchase price? My lender is telling me that they may only contribute up to 3% and I would like to be able to back up my claim.

    • Joe Wallace says:

      There is a proposal to reduce the seller concession to 3% but at the time of the writing of this blog post that proposal had not been published as an actual change in the rules. Best advice–contact directly to learn the status of that proposal, which was being reconsidered earlier this year, possibly due to housing market concerns. According to the original press release, the change was proposed to:

      “Reduce allowable seller concessions from 6% to 3% The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions. This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.”

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