Your participating lender will have a set of guidelines to follow for your loan including certain restrictions on the source of your down payment funds.
Did you know that FHA loan rules forbid the seller of the home from contributing toward the borrower’s down payment? That is a very important rule a first-time homebuyer should know when thinking about applying for home loans.
But it doesn’t end there. Your seller IS permitted to offer assistance with closing costs, and those funds will be applied to approved expenses related to your home loan.
The seller is allowed to contribute up to six percent of the sale price of the home (for some mortgages like VA loans, this amount may be less) toward your costs to close.
But the seller is NOT permitted to provide money above and beyond that six percent without penalty. That penalty is a dollar-for-dollar reduction in the loan amount for any contribution that exceeds the six percent limit.
HUD and the FHA have strict rules regarding these issues and you may find that the rules are not consistent when you are seeking a conventional loan instead of an FHA mortgage–much will depend on lender requirements.
First-time borrowers should know that a homebuyer program in your local area may be able to assist legally with the amount of your down payment–your lender is able to accept down payment assistance programs that meet FHA requirements.
If you are a first-time buyer or have not owned a home in three years or more, it’s worth checking out these first time buyer programs (which are usually intended for a primary residence, not a business or investment property) that may be offered by a local agency in your area.
In order to take advantage of some of these, you may be required to get homeowner counseling from a housing counseling agency or other approved entity.
A first time buyer should know that negotiating with the seller is an important part of the loan process, especially in cases where the appraised value of the home is lower than the asking price.
You are free to walk away from such a situation, but if you are in love with the home and the purchase price issue doesn’t make you change your mind, you are free to pay the difference in cash at closing time between the appraised value and the asking price.
But you will not be forced to do so–you can walk away without penalty. Some borrowers wind up walking away from a home loan deal after inspections show issues with the home–you can do this too but it usually requires any commitment to purchase to be contingent on the outcome of the home inspection process.
FHA loans feature a low down payment, more forgiving credit terms, and lower interest rates than some conventional options. You owe yourself a comparison between FHA lenders and conventional loans before you decide–you’ll be glad you did.