FHA Loans and Third-Party Contributions
November 3, 2021
It’s true that you, the buyer, may not have to pay all your closing costs yourself. There are local down payment and closing cost assistance programs (see your state government official site to find one near you) but there are also possibilities for the seller to contribute as well--something you must negotiate.
How much and to which areas can the third party contribute if you are buying a home with an FHA mortgage?
Down Payment Rules
Down payments are an important part of this discussion---that is because down payment funds are strictly regulated and must come from an approved source. What does “approved” mean? Simply that the lender must be able to investigate to make sure FHA loan rules have been followed.
Down payment contributions (which are completely separate from closing cost contributions) cannot come from what the FHA describes as “interested parties.”
Who are these people? They can, according to HUD 4000.1, include “sellers, real estate agents, builders, developers or other parties with an interest in the transaction.” But that does NOT mean these interested parties can contribute NOTHING.
In some cases that may be true but where the seller is concerned? The money cannot come in the form of a down payment gift or other down payment assistance.
Six Percent Contributions
The seller is permitted to contribute up to six percent of the price of the home toward closing costs. But others may also contribute that six percent. HUD 4000.1 explains what interested parties may contribute:
Interested parties may contribute up to 6 percent of the sales price toward the Borrower’s origination fees, other closing costs and discount points. The 6 percent limit also includes:
“Interested Party Contributions that exceed actual origination fees, other closing costs, and discount points are considered an inducement to purchase. Interested Party Contributions exceeding 6 percent are considered an inducement to purchase.”
Inducements to Purchase
What is the consequence of exceeding the six percent restriction? FHA loan rules require the lender to reduce the amount of the loan dollar-for-dollar in such cases.
It is important to note that some payments are NOT considered to be interested party contributions and DO NOT count towards the limit of six percent. Third-party payment of real estate agent fees, commissions, or fees traditionally paid by a certain party to the loan transaction in that housing market--all of these are exempt from the six percent limitation.
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How much and to which areas can the third party contribute if you are buying a home with an FHA mortgage?
Down Payment Rules
Down payments are an important part of this discussion---that is because down payment funds are strictly regulated and must come from an approved source. What does “approved” mean? Simply that the lender must be able to investigate to make sure FHA loan rules have been followed.
Down payment contributions (which are completely separate from closing cost contributions) cannot come from what the FHA describes as “interested parties.”
Who are these people? They can, according to HUD 4000.1, include “sellers, real estate agents, builders, developers or other parties with an interest in the transaction.” But that does NOT mean these interested parties can contribute NOTHING.
In some cases that may be true but where the seller is concerned? The money cannot come in the form of a down payment gift or other down payment assistance.
Six Percent Contributions
The seller is permitted to contribute up to six percent of the price of the home toward closing costs. But others may also contribute that six percent. HUD 4000.1 explains what interested parties may contribute:
Interested parties may contribute up to 6 percent of the sales price toward the Borrower’s origination fees, other closing costs and discount points. The 6 percent limit also includes:
- Interested party payment for permanent and temporary interest rate buydowns, and other payment supplements
- Payments of mortgage interest for fixed rate mortgages
- Mortgage payment protection insurance
- Payment of the UFMIP
“Interested Party Contributions that exceed actual origination fees, other closing costs, and discount points are considered an inducement to purchase. Interested Party Contributions exceeding 6 percent are considered an inducement to purchase.”
Inducements to Purchase
What is the consequence of exceeding the six percent restriction? FHA loan rules require the lender to reduce the amount of the loan dollar-for-dollar in such cases.
It is important to note that some payments are NOT considered to be interested party contributions and DO NOT count towards the limit of six percent. Third-party payment of real estate agent fees, commissions, or fees traditionally paid by a certain party to the loan transaction in that housing market--all of these are exempt from the six percent limitation.
------------------------------
RELATED VIDEOS:
Learn How to Meet FHA Requirements
A Few Tips About Your Fixed Rate Mortgage
Your Proof of Ownership Is the Property Title
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