August 18, 2017
Can my seller pay some of my closing costs? The basic answer is, “yes, within certain limits.” FHA loan rules permit certain expenses to be negotiated between buyer and seller, including the contribution of allowed costs. How does it work?
FHA Loan Rules For Interested Party Contributions
HUD 4000.1, the FHA loan handbook, defines “interested parties” as “sellers, real estate agents, builders, developers or other parties with an interest in the transaction”. HUD 4000.1 states that such interested parties are permitted to offer payments on “origination fees, other closing costs and discount points” within the bounds of FHA loan rules (more on that below), state law, and lender standards.
What Payments Can An Interested Party Contribute?
HUD 4000.1, page 232, states that an interested party or parties may contribute towards the following:
-payment for permanent and temporary interest rate buydowns, and other payment supplements;
-payments of mortgage interest for fixed rate Mortgages;
-Mortgage Payment protection insurance;
-payment of the Up Front Mortgage Insurance Premium
Some costs paid by those other than the buyer are not counted under “interested party contributions”. Such costs are those which are considered “reasonable and customary” in that housing market. From HUD 4000.1:
“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. The satisfaction of a PACE lien or obligation against the Property by the property owner is not considered an Interested Party Contribution.”
Why is knowing this important? Because, as we’ll see below, the FHA puts a cap on how much an interested party may contribute.
What Payments May Not Be Made By Interested Parties
There is a specific prohibition in HUD 4000.1, against interested party contributions towards a borrower’s required down payment. No interested party contributions can be considered part of a down payment, and no person or entity with a financial stake in the outcome of the transaction may provide down payment loans.
FHA loan rules add, “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.”
An inducement to purchase will result in a dollar-for-dollar reduction in the loan amount for the specific amount considered an inducement to purchase.
State law and lender standards may also affect how your FHA loan transaction is to be carried out, especially where interested party contributions are concerned. Discuss your needs or concerns with a loan officer to find out what is permitted with your participating FHA lender.
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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