Are you worried about how you will afford the closing costs on an FHA loan? Luckily, the FHA has your back. They do allow sellers to help you out with the closing costs. This is good news, but you should know the requirements before you move ahead with the transaction.
The Maximum Contribution
First, you should know that the maximum contribution a seller can provide on an FHA loan is 6% of the home’s purchase price. If the seller provides more than 6% of the sales price, the FHA considers this an inducement to purchase. In other words, the seller is ‘paying the seller’ to buy his/her house. The FHA rules against this, which is why the 6% rule is in place.
The Closing Costs a Seller Can Pay
The FHA doesn’t specify which closing costs a seller can pay on an FHA loan. As long as you stick to the 6% rule and the seller doesn’t provide more than what the closing costs are, the seller concessions are allowed.
Some of the common closing costs sellers cover include:
- Origination fees
- Discount points
- Mortgage insurance
- Lender fees
- Title fees
- Appraisal fees
Again, as long as the seller doesn’t pay more than 6% of the sales price, the lender should allow the seller concessions.
How Sellers Can Pay Closing Costs
You might wonder how a seller can pay the closing costs or why he/she would want to in the first place?
It does make sense in certain situations. Sellers want to sell their home. If they know you are qualified for a mortgage, but you just can’t come up with the full amount for the closing costs, the seller may be willing to help, especially if he/she gets at least as much as they wanted for the home.
Technically, the seller can negotiate a higher sales price with you and then cover your closing costs with the extra money. As long as the final purchase price doesn’t exceed the value of the home, lenders can allow this. This way the seller is helping you get the home by paying your closing costs, but you actually pay them in your loan. You increased the purchase price of the home and since you likely borrowed 97.5% of the price of the home, you will have a slightly higher mortgage with the larger mortgage amount.
In some cases, sellers price the home with the intention of helping the seller with the closing costs. They start at a higher price so that once negotiations are over, they are still at a number that allows them to walk away with a profit and help the buyer with their closing costs, if need be.
Other Ways to Get Around Closing Costs
If you can’t find a seller willing to cover your closing costs, you do have one more option. The no-closing-cost loan may be a suitable choice. You’ll have to find a lender willing to offer this option, but many do offer it today.
The no-closing-cost loan means the lender covers the closing costs. In exchange for this service, they charge you a higher interest rate. Usually it’s between a 0.5% and 0.75% difference in the interest rate. You’ll have to determine if you can afford the higher payment and if it makes sense to pay more interest over the life of the loan. Remember, you’ll pay interest for 15 -30 years, which could mean thousands of dollars.
If you don’t have money for closing costs, it doesn’t have to be the end of the road for you. There are ways that you can buy a home and have help from the seller or even the lender. Explore all of your options to see how buying a home can be possible for you.