Much of our discussion here about FHA home loans is focused on the buyer; what the FHA borrower can and cannot do with an FHA mortgage or refinance loan, how occupancy rules may dictate whether a home loan is approved or not, etc.
But there are some FHA mortgage loan rules that affect the seller, too. Not all the FHA loan guidelines concentrate on the lender or borrower.
For example, the seller is allowed to contribute a certain amount of money toward the costs of the home loan, but those contributions cannot exceed FHA and lender limits. If the seller’s contribution DOES exceed the limit, the borrower’s loan must be reduced dollar-for-dollar for the full amount above the FHA limit.
There is a list of things that can result in such a dollar-for-dollar reduction in the principal loan amount. They include but are not limited to:
- contributions exceeding 6 percent of the purchase price;
- contributions exceeding the origination fees, other closing costs and discount points;
- decorating allowances;
- repair allowances;
- moving costs;
- paying off consumer debt;
- sales commission on the Borrower’s present residence;
- below-market rent, except for borrowers who meet the identity-of-interest exceptions for family members.
Sellers are forbidden from making contributions to the borrower’s minimum required down payment, and they are not allowed to provide things like free rent or excessive rent credits to prospective buyers as an inducement to purchase.
Note that in the circumstances mentioned here, the seller is not penalized in any way but not meeting FHA standards in this manner can hurt the borrower.
There are other situations in the FHA loan rulebook that affect the seller and not just the FHA loan applicant. For example, a seller who has purchased a home and then flips it (depending on how long the house has been owned before it reenters the real estate market) may find that FHA home loans are simply not approved for properties purchased and then placed up for sale again too quickly.
HUD 4000.1 (the FHA loan handbook) instructs the lender, “Property Flipping is indicative of a practice whereby recently acquired Property is resold for a considerable profit with an artificially inflated value” and goes on to state clearly that a home that is back on the market, “…90 Days or fewer following the seller’s date of acquisition is not eligible for an FHA-insured Mortgage”.
There are exceptions to these time restrictions on resale, including homes that the seller has inherited and put on the market soon thereafter. Houses sold by HUD under the HUD REO program are also exempt from this time restriction.
In addition to the rules here, lender requirements may also apply and state law will factor in for some types of transactions if there are applicable guidelines which must be followed.
Ask your loan officer if your FHA loan transaction might be affected by such rules and what to be aware of when its’ time to get a decision on an FHA mortgage.