July 20, 2015
We recently got a question about an FHA loan situation where the seller of the home agreed to pay 3.5% of the closing costs on a transaction. According to the reader question, the “actual permitted seller concessions” were much lower. The reader asked, “Since FHA would not allow cash back”, the buyer asked the seller for the difference of the two amounts to be paid to the borrower, “outside of closing” The question the reader asks: Is this legal?
FHA loans do not permit cash back to the borrower except in the form of refunds. However, HUD 4155.2 does include some guidelines for seller concessions, which are limited to six percent of the sales price. Those guidelines do permit “monetary gifts” as we’ll read in a moment.
Chapter Four of HUD 4155.2 has a section titled Lender Requirements Regarding Sales Concessions. It states:
“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
Later on in Chapter Four, we learn more about what must happen with seller concessions:
“FHA requires that lenders comply with the requirements listed below with respect to sales concessions:
–on any real estate purchase transaction, the lender must provide the appraiser with a complete copy of the ratified sales contract, including all addenda, for the subject property that is to be appraised
–lenders must provide appraisers with all financing data and sales concessions for the subject property granted by anyone associated with the transaction (Note: Sales concession information must include gifts and/or down payment assistance, which may or may not be included in the contract of sale.), and
–if a lender requests a reconsideration of value, the lender must provide the appraiser with any amendments to the contract that occurred after the effective date of the appraisal.
Note: Contributions from sellers or other interested third parties to the transaction that exceed 6 percent of the sales price or other financing concessions must be treated as inducements to purchase, thereby reducing the amount of the mortgage.”
So this is a tricky area–there must be documentation for any seller concessions, so the buyer and seller can’t arrange to do this “off the books” based on this reading of Chapter Four–the lender is responsible for documenting all concessions. State law may also play a role in this part of the FHA loan process, so its best to learn what may be applicable where your transaction is being carried out.
Do you have questions about FHA loans? Ask us in the comments section.