Seller Concessions on FHA Loans

Can the home seller really pay my closing costs?

Seller and home buyer ageeing on a seller concessionOne of the benefits of an FHA home loan is the seller paid closing cost option. The Federal Housing Administration allows the home seller to pay up to 6% of the sales price toward the buyer's closing costs. The FHA does not require any seller assistance, but most sellers choose to help buyers sell their house.

The FHA has specific rules that govern the seller assistance. The first condition that must be complied with is that the seller assist cannot be applied to the home buyer's down payment.

The term “Interested Parties” refers to sellers, real estate agents, builders, developers, mortgagees, and other parties involved in the transaction.

Borrower origination expenses, closing charges (including those paid outside of settlement), and borrower origination fees may total up to 6% of the sales price.
Additionally, the 6% limit applies to the following items:

  • Payment of interest rate reductions*, both permanent and temporary, as well as other payment improvements;
  • Interest payments on fixed-rate mortgages;
  • Insurance against missed mortgage payments, as well as
  • Initial mortgage insurance premium payment (funding fee).

Contributions in excess of origination fees, other closing costs, prepaid expenses, and discount points; and Interested Party Contributions in excess of 6% are considered inducements to purchase and result in a dollar-for-dollar reduction in the purchase price when calculating the property's Adjusted Value before applying the appropriate loan-to-value (LTV) percentage. Contributions from interested parties may not be used to satisfy the minimum investment requirement of the borrower.

Premium Pricing credits from the lender or TPO are not subject to the 6% maximum if the lender or TPO is not the seller, real estate agent, builder, or developer.

Commissions or fees paid to real estate agents, which are often paid by the seller in accordance with local or state law or custom, are not regarded an interested party contribution.

Form HUD-92900-LT and the Closing Disclosure or comparable legal document must detail the complete Interested Party Contribution.

If the Mortgagee records the Interested Party Contributions through a legally enforceable document other than the sales contract, the Mortgagee must provide a copy to the appointed Appraiser.

* temporary interest rate reductions – interest rates can be reduced for a short time by paying a one-time fee paid upfront

Can You Ask the Seller to Pay Closing Costs?

A commonly asked question by home buyers is whether it is preferable to seek a sales price reduction or seller assistance.

Column A is a formula in which the seller pays 6% of the expenses incurred by the house buyer.

Column B shows a decrease in the sales price ($94,000).

As you can see, the seller-paid closing cost option lowers the cash needed to $3,500, but comes at the expense of a larger monthly payment.

Column B illustrates a lower sales price with no seller assistance; the cash required is much greater, but the monthly payment is also lower due to a lower mortgage amount.

  A B
Sales price $100,000 $94,000
     
Closing costs 3,500 3,500
Prepaid costs 2,500 2,500
SUB-TOTAL $106,000 $100,000
 
Less seller paid costs 6% $6,000 - 0 -
Down payment (3.5%) $3,500 $3,500
Cash at settlement $3,500 $9,500
     
Interest rate/30 year term 4% 4%
 
Monthly payment $506 $449 $57

SOURCE: US Department of Housing and Urban Development

Conclusion

In conclusion, FHA seller concessions can be a helpful way to sell a home. However, it is important to be aware of the rules and regulations that come with them. By understanding the process and what is required, both buyers and sellers can benefit from this type of transaction.