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What Costs Can the Seller Pay for the Buyer With an FHA Loan?
Negotiating a home purchase can be a daunting task, regardless of what side of the deal you're on. Buyers obviously need the best deal for their money , but the dilemma for some is how to make an offer that is reasonable for both buyer and seller.
For the seller, getting the most out of a major investment like a house is crucial, but setting a buyer-friendly price is also a consideration. How can buyer and seller come to a happy medium and close the deal?
When it comes to buying a home with a FHA guaranteed mortgage, the FHA loan program has some options buyers and sellers alike can use to make that closing a reality.
In the course of buying a home with a FHA-guaranteed mortgage, buyers and sellers negotiate the sales price, but what if the agreed price is higher than the borrower wants to pay or is higher than the fair market value of the home as stated after the appraisal? The seller can improve his or her position by offering to contribute a percentage of the sales price towards the buyer's closing costs, discount points or other FHA loan costs.
If the buyer agrees to the contribution, it can potentially reduce the amount of money the borrower has to pay up front if there's a difference in the fair market value of the home and the asking price. FHA requirements in this area have two important features. The first is that the seller can't contribute more than six percent of the sales price without affecting the amount of the FHA insured loan.
Any contribution in this area from the seller beyond six percent is considered an "inducement to purchase". The FHA lowers the amount of the mortgage accordingly, based on FHA requirements, which state; "Each dollar exceeding FHA's six percent limit must be subtracted from the property's sales price before applying the LTV ratio."
Another aspect of this rule that's important to keep in mind--the seller may contribute six percent only for actual costs related to closing, interest rate buydowns, discount points or other concessions.
FHA mortgage loan rules prevent a lender from artificially inflating the cost of services, and the rules also prohibit the borrower and seller from inflating closing costs, interest rate buy-downs or other contributions.
Sellers should not to confuse their contribution with other amounts of money they may be required to pay as part of the FHA home loan process. The FHA rules state, "Fees typically paid by the seller under local or state law, or local custom, such as real estate commissions, charges for pest inspections, fees paid for trustees to release a deed of trust, etc., are not considered contributions." That means such payments do not get counted as part of the six percent limit.