Seller concessions are a commonly asked-about topic related to FHA home loans. FHA loan rules permit a seller (or a “third party”) to contribute up to six percent of the sales price or appraised value of the property toward closing costs, discount points or “other financing concessions” according to the FHA official site.
The six percent limit would be the lesser of the two amounts–the sale price or appraised value. What specifically can the seller or third party contribute? According to FHA loan rules spelled out in Chapter Two of HUD 4155.1, that six percent limit may include:
- third 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 upfront mortgage insurance premium (UFMIP).
The rules also include a note which states, “Contributions exceeding six percent are considered inducements to purchase.” Additionally, FHA loan rules do not consider broker fees to be part of this six percent limit. According to Chapter Two, “Payment of real estate commissions or fees, typically paid by the seller under local or state law, or local custom, is not considered an interested third party contribution.”
When reading the above, many will wonder what “inducement to purchase” means; an inducement to purchase is a contribution above and beyond the six percent limit. Such contributions require the lender to reduce the FHA loan amount accordingly. An inducement to purchase will reduce the loan amount by the dollar value of the inducement. What could be considered an inducement to purchase?
According to Chapter Two;
• contributions exceeding 6% of the sales price
• contributions exceeding the actual cost of prepaid expenses, discount points, and other financing concessions
• decorating allowances
• repair allowances
• moving costs
• other costs as determined by the appropriate Homeownership Center
For more information contact the FHA directly by calling 1-800 CALL FHA.
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