FHA loans are government-insured mortgages designed to make home ownership affordable for borrowers with less-than-perfect credit or limited budgets. Seller contributions are allowed as part of an FHA loan, but may be capped depending on the type of loan and the amount of the down payment.
In general, FHA loans allow a seller or other interested party to contribute up to 6% of the purchase price of a property toward closing costs. This is in addition to any earnest money deposit that a buyer may already have put down. However, there are some restrictions on how much a seller can cover. For instance, a seller cannot pay more than 2% of the appraised value of the property. They also cannot pay for any of the borrower’s down payment unless it is a gift.
In addition to the above restrictions, FHA also requires that sellers “not pay for points, origination fees, or discount points to reduce the interest rate.” This means that a seller cannot pay any of the closing costs associated with the loan, such as appraisal fees, title insurance, or any other loan-related fees.
Another thing to keep in mind is that seller contributions are only allowed for primary residences. If the loan is for an investment property, no seller contributions are allowed. Also, seller contributions may be reduced or eliminated if the down payment is 20% or greater. Finally, FHA does not allow seller concessions to be used to pay off any outstanding debts that the borrower has.
In conclusion, FHA loan rules regarding seller contributions can be complicated. It is important for a potential borrower to understand all the rules before entering into a loan. Generally speaking, FHA loans allow sellers to contribute up to six percent of the purchase price of a property towards closing costs. However, this figure may be limited in some cases, such as if the loan is for an investment property or if the down payment is 20% or greater. Furthermore, sellers cannot pay for any of the borrower's down payment or any fees associated with the loan. Understanding FHA loan rules can help a borrower ensure they are getting the most out of their loan.
This article was contributed on Nov 08, 2023
