FHA loans are among the few programs that allow seller concessions. The seller can contribute this money towards your closing costs. Right now, the seller can contribute up to 6% of the sales price of the home. The seller can’t contribute more than the cost of the closing costs, though. Below we will discuss what the seller can help pay for and how it’s done.
The Allowed Closing Costs
The FHA considers sellers an interested party. They gain something through the sale of the home. In this case, it’s money. They want you to buy the home. By contributing money, they are helping make this occur. The FHA oversees what the seller contributes to make sure the transaction is fair for everyone involved.
The FHA allows sellers to help pay:
- Origination fees charged by the lender
- Discount points to lower the interest rate
- Standard closing costs
- Prepaid mortgage interest
- Upfront mortgage insurance premium
Fees the FHA Doesn’t Allow
There are certain fees the FHA doesn’t allow sellers to contribute towards. These fees include:
- Commissions for a real state agent
- Fees the seller must pay according to the law
These fees are the responsibility of the seller. The seller can’t make the borrower think they are doing them a “favor” by paying these fees. This may entice the buyer to purchase the home under false pretenses.
Going Over the FHA Limit
The FHA has this limit of 6%. On a $200,000 loan, this means $12,000. What happens if the seller goes over that amount? Luckily, the FHA won’t cancel the loan. They will, however, lower the loan amount. Consider it a dollar-for-dollar exchange. For every dollar over the 6% maximum the FHA allows, your loan amount will be decreased. In the above example, let’s say the seller contributed $14,000. Your loan amount would decrease by $2,000.
Other Ways to Get Help With Closing Costs
Sometimes sellers don’t have enough equity to help buyers with their closing costs. If this is the case, you can ask the lender for help. Lenders can offer you a no-closing cost mortgage. Essentially, this means a loan with a higher interest rate. Lenders make their money off the interest of your loan rather than the closing costs in this case. You can usually find a lender that will charge just 0.5% more on your interest rate. This only makes a difference of a few dollars on your mortgage payment. If it means no closing costs, though, you can get the loan you need without paying too much out of your own pocket.
Sellers can help you with closing costs on an FHA loan, but you must be careful. They can’t provide you with more funds than the actual closing costs. For example, let’s say you have closing costs of $5,000 and the seller credits you $6,000. This isn’t allowed. The seller is no longer covering the closing costs. Now he’s paying you to buy the home. Because the seller is an interested party, this can cause problems.
If you wish to take seller concessions, talk to your lender about what they allow. Lenders can usually tailor your interest rate and closing costs so that the seller can afford to cover the costs. Keep in mind, you may pay a higher interest rate. If you plan to stay in the home for the long-term, it may not be to your advantage to take the higher rate. Talk to your lender about your options to see if taking seller concessions makes sense for your situation.