When it is time to negotiate the purchase of a home using an FHA home loan, borrowers should know that sellers can, and often do, make contributions to the sale in order to make the deal more enticing or to help the borrower reduce up-front costs.
Such contributions, known as seller concessions, are permitted within a certain set of boundaries and are limited to six percent of the sales price of the home. Any seller contributions that exceed that six percent limit requires a dollar-for-dollar reduction in the loan amount.
According to FHA loan rules, “Sales concessions influence the price paid for real estate. For this reason, FHA requires that appraisers identify and report sales concessions and properly address and/or adjust the comparable sale transactions to account for sales concessions in the appraisal of all properties to be security for an FHA- insured loan.”
What kinds of contributions can the seller make? FHA loan rules spell out the answer to that question rather clearly in HUD 4155.2, Chapter Four:
“Sales concessions may be in the form of any of the following concessions given by the seller or any other party involved in a mortgage transaction:
loan discount points
loan origination fees
interest rate buy downs
closing cost assistance
payment of condominium fees
down payment assistance
monetary gifts, or
A seller may or may not be able to contribute certain types of high-value personal property as a concession–depending on circumstances, some items may be considered “inducements to purchase” and result in a reduction in the loan amount based on the dollar value. Borrowers who may be offered seller concessions should discuss them with the lender if there is any doubt as to whether a particular concession is permitted or not.
Sellers are not the only ones restricted to the six percent rule–any third party contributing toward the sale would be required to follow the rules in HUD 4155.2 Chapter Four as mentioned above.