Negotiating with a seller doesn’t always mean trying to get a lower price. Sometimes, buyers need help with things like the closing costs. When it comes to the FHA loan, just what FHA closing costs can the seller pay? We take a look at the answer below.
The Six Percent Rule
Luckily, the FHA does allow sellers to pay the FHA closing costs. However, they can only pay up to six percent of the home’s sales price. They can only provide a credit that is equal to the amount of the closing costs, as well. For example, if you pay $200,000 for a home, the seller can contribute up to $12,000. However, if the closing costs are only $10,000, the seller can only credit you $10,000.
What Can the Seller Pay?
The next question is just what can the seller pay? They are an interested party, so it’s a fine line they walk when it comes to paying the FHA closing costs. The lender must make sure it is not an ‘ inducement to purchase.’ Another way to look at it is a bribe.
Sellers can pay towards your closing costs which include:
- Origination or discount points
- Lender charged closing costs
- 3rd party closing costs (appraisal, lawyer, title company)
- Prepaid mortgage interest
- FHA mortgage interest
The only fees the seller cannot pay are any commissions for a real estate agent. They also cannot credit you for any fees the law requires them to pay in the first place.
The seller must pay the fees in good faith without making the seller feel like they are cutting them a deal or enticing them to buy the home.
What if the Seller Contributes More than Six Percent?
The technical rule is that sellers cannot contribute more than six percent of the sales price. What if they do, though? What does the FHA lender do?
If the lender allows it, they must decrease your loan amount based on the amount the credit goes over six percent. In the above example, let’s say the seller contributed $15,000. That’s $3,000 more than the allowed amount. The lender would then have to decrease your loan amount $3,000. It’s a dollar-for-dollar exchange. In other words, you’d have to come up with another $3,000 for your down payment. It’s kind of a Catch 22 in the end.
Luckily, seller paid FHA closing costs aren’t your only option if you can’t pay your closing costs yourself. You can also ask the lender for help or get a gift from relatives, your employer, or a charitable organization.
- No closing cost loan – The lender can give you a no-closing cost loan. In exchange for no closing costs, you’d pay a higher interest rate. It is usually 0.25% to 0.5% more than the basic interest rate.
- Gift money – If you have access to gift money from a relative, employer, or charity, you can use it towards your closing costs. Talk to your lender before accepting the funds though. There is a specific way you should accept the funds as well as document them for use on the loan.
You have several options when it comes to covering your FHA closing costs. Since the FHA loan is so flexible and allows a low down payment, it can be a beneficial loan. If you can’t afford the closing costs, though, explore your options. If you receive a credit from the seller, consider the implications on your loan amount. Generally, sellers require a slightly higher sales price in exchange for the credit. If you get help from the lender, you’ll pay a higher interest rate.
Only you know what works best for you. Weigh all of your options and see which one is the most affordable for you.