What Can Sellers Help You at Purchase Time?

October 25, 2019

If you are buying a home with an FHA mortgage, your seller may be able to help thanks to a rule that permits the owner of the home to contribute up to six percent of the sale price of the home (but no more) toward approved closing costs.

Your seller can help you in this way to free up money you the borrower would have otherwise paid in closing costs--money that could go toward your down payment instead.

But the seller has some restrictions in this area you should know about as any violation of the FHA loan rules in this area can result in a reduction of your loan amount dollar-for-dollar based on the value contributed above and beyond the six percent limit.

There are also, as we’ll explore below, limits on what the seller can offer you in terms of other considerations aside from cash.

Seller Contributions Versus Inducement to Purchase

FHA loan rules for purchase loans say the seller cannot contribute certain items or offer to pay for certain aspects of the borrower’s home loan transaction.
 
For example, while the aforementioned six percent contribution toward closing costs is allowed, offering the borrower the opportunity to live in the property to be purchased at “below fair market rent” would also be considered a violation of the rules in most cases.

So is the seller offering to pay certain sales commissions for the borrower. From HUD 4000.1, the FHA Single-Family home loan handbook:

“An inducement to purchase exists when the seller and/or Interested Party agrees to pay any portion of the Borrower’s sales commission on the sale of the Borrower’s present residence.”

Another example? When “a Borrower is not paying a real estate commission on the sale of their present residence,” but the same real estate broker or agent is connected to both transactions, “...and the seller is paying a real estate commission on the Property being purchased by the Borrower that exceeds what is typical for the area.”

So there are definite limits to what the seller can do for the borrower; the seller can’t offer help with moving costs, decorating, or contribute cash that exceeds origination fees, closing costs, or discount points.

Remember that no party with a financial stake in the transaction can help an FHA borrower with down payment funds, and down payments are not considered to be in the same category as closing costs. The money you pay as a cost of doing business with your lender cannot be used as part of your down payment, which must be applied to the loan balance itself.

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