Do you know how FHA loan rules for inducement to purchase can affect your FHA loan transaction? We often discuss the basics about FHA home loan requirements, and especially in the area of seller rights and responsibilities, but there are other issues associated with inducements to purchase you should know about aside from the obvious issues.
What kind of requirements?
Many know that sellers may contribute up to six percent of the sale price of the home toward the borrower’s closing costs.
But the FHA’s six percent rule (no interested party contributions above six percent of the sale price of the home without a corresponding reduction in the home loan amount) is just one factor.
There are other inducements to purchase that can also result in a reduction of the loan principal amount to match the exact dollar amount of the inducement.
The rules for this are found in HUD 4000.1. On page 233, we find the following instructions to the lender:
“Inducements to Purchase refer to certain expenses paid by the seller and/or another Interested Party on behalf of the Borrower and result in a dollar-for-dollar reduction to the purchase price when computing the Adjusted Value of the Property before applying the appropriate Loan-to-Value (LTV) percentage.”
Such inducements include, but aren’t limited to, the following list:
- The previously mentioned contributions exceeding 6 percent of the purchase price;
- FHA loan contributions exceeding the origination fees, other closing costs and discount points;
- decorating allowances;
- repair allowances;
- excess rent credit;
- moving costs;
- paying off consumer debt;
- personal property
Also, keep in mind that what you see in this list are FHA loan standards and do not necessarily reflect lender requirements or state law, which can also have a say in how your transaction will proceed. Also, it’s important to discuss the final item on that list-personal property.
FHA loan rules say personal property may not be considered an interested party contribution requiring a dollar-for-dollar reduction in the loan amount where certain property types or situations are concerned.
“Replacement of existing Personal Property items listed below are not considered an inducement to purchase, provided the replacement is made prior to settlement and no cash allowance is given to the Borrower.”
“The inclusion of the items below in the sales agreement is also not considered an inducement to purchase if inclusion of the item is customary for the area:
- window treatment
- other items determined appropriate
Talk to your loan officer to determine whether there are additional lender requirements or state law which may also affect how these issues are handled at the financial institution of your choice. There are many nuances involved in home loans, this is just one of them.