Who Can Pay FHA Mortgage Closing Costs and Related Expenses
December 22, 2010
When it's time to purchase a home with an FHA mortgage, the house hunter pays a variety of fees. Buying a home doesn't just mean preparing for monthly mortgage payments--there are closing costs, fees, and mortgage insurance premiums that must be budgeted for and paid.
These costs can be daunting when a first-time home buyer starts doing the math, but when it's time to meet sellers and talk about closing deals, new buyers are often surprised to learn that sellers not only anticipate these problems but offer incentives in the form of financial contributions towards the sale--the seller might try to make the home more attractive to potential buyers by offering to pay some of these fees including discount points and closing costs as allowed by FHA regulations.
Contributions can go a long way toward helping a first time home buyer afford that first home; closing costs and related fees do start to add up. A smart seller knows this and may offer to help, but the FHA doesn't allow an "anything goes" approach to third-party payments in these areas. The buyer and other interested parties (including family members) are limited by law to a six percent cap on contributions and those contributions must be put towards "actual costs" of the loan.
The buyer won't get into legal trouble by accepting more than six percent, but any amount above the six percent cap is considered an inducement to purchase under FHA requirements. That means the mortgage amount is reduced accordingly for every dollar above 6%.
Some payments are not considered a "contribution" and are fairly common practices. Any costs the seller would normally pay under state or local law, or even according to local custom is not included in the six percent cap. A real estate commission, for example, wouldn't be included, nor would money paid to fix a pest control problem.
Items that can be included in the six percent calculation?
The FHA requirements include "seller payment for permanent and temporary interest rate buydowns and other payment supplements such as payments of mortgage interest for fixed rate mortgages and GPMs only (but not principal), mortgage payment protection insurance, and payment of UFMIP" according to FHA rules.
These costs can be daunting when a first-time home buyer starts doing the math, but when it's time to meet sellers and talk about closing deals, new buyers are often surprised to learn that sellers not only anticipate these problems but offer incentives in the form of financial contributions towards the sale--the seller might try to make the home more attractive to potential buyers by offering to pay some of these fees including discount points and closing costs as allowed by FHA regulations.
Contributions can go a long way toward helping a first time home buyer afford that first home; closing costs and related fees do start to add up. A smart seller knows this and may offer to help, but the FHA doesn't allow an "anything goes" approach to third-party payments in these areas. The buyer and other interested parties (including family members) are limited by law to a six percent cap on contributions and those contributions must be put towards "actual costs" of the loan.
The buyer won't get into legal trouble by accepting more than six percent, but any amount above the six percent cap is considered an inducement to purchase under FHA requirements. That means the mortgage amount is reduced accordingly for every dollar above 6%.
Some payments are not considered a "contribution" and are fairly common practices. Any costs the seller would normally pay under state or local law, or even according to local custom is not included in the six percent cap. A real estate commission, for example, wouldn't be included, nor would money paid to fix a pest control problem.
Items that can be included in the six percent calculation?
The FHA requirements include "seller payment for permanent and temporary interest rate buydowns and other payment supplements such as payments of mortgage interest for fixed rate mortgages and GPMs only (but not principal), mortgage payment protection insurance, and payment of UFMIP" according to FHA rules.
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