FHA Closing Costs Paid by Seller

Nice houseOne 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 seller assistance is not required by the FHA, however many home sellers will cooperate with the buyer in order to sell their house.

The FHA has specific rules that govern the seller paid closing costs. 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.

The Mortgagee must document the full Interested Party Contribution in the sales contract or other legally binding instrument, form HUD-92900-LT, and Closing Disclosure or similar legal document. 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

Should I ask the seller to pay my 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.

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