FHA loans are rather lenient regarding gift funds and other contributions when buying a home. However, they do regulate what sellers or other interested parties can and cannot contribute. They call them inducements to purchase. In other words, it’s like bribing the buyer to buy the home. The FHA does not allow this by restricting the money contributed toward the purchase.
What Can Sellers Contribute?
First, let’s start with the money sellers can contribute to the sale of their home. As a generic rule, sellers can give buyers up to 6% of the purchase price in seller’s concessions. If the home is $200,000, the seller can contribute up to $12,000. This money can go towards the buyer’s closing costs, discount points, and origination fees.
In some cases, the seller can also include money for prepaid interest on a fixed rate loan, and funds for upfront mortgage insurance or mortgage payment protection insurance. These allowances are included in the 6% maximum. If the seller already hit the 6% by helping with the origination points, discount points, and closing costs, they cannot provide additional funding for any other costs.
Defining the Inducements to Purchase
Any of the above costs are not considered inducements to purchase. The seller is free to help the buyer in those respects. However, it’s easy to cross the line rather quickly. If the seller does any of the following, it’s a violation of the FHA rules:
- Contributes more than 6% of the purchase price
- Contributes more than the actual cost of the origination points, discount fees, or closing costs
Getting even more specific, sellers cannot help with any of the fees in regards to the following:
- Any expenses related to the decorating or repair of the home
- Help with any moving costs
- Assistance in paying off any debt to help the buyer qualify for the loan
- Paying the real estate commission on the buyer’s current residence
Sellers are also not allowed to contribute to the buyer’s personal property. However, there is an exception. Including personal property, such as appliances or window treatments in the sales contract is not a breach of FHA rules. It’s also acceptable for the seller to replace any appliances or window treatments for the buyer if the seller takes the current items with them. This must all occur prior to the closing and no cash must exchange hands, though.
Anything that exceeds the actual cost of getting the loan and closing on it is not allowed.
What Happens if There is an Inducement to Purchase?
What if the seller commits an inducement to purchase? The FHA requires the lender to decrease the value of the home dollar-for-dollar. For example, if you receive $1,000 in seller concessions beyond the 6%, the lender must decrease the value of your home by $1,000. The lender then bases the loan-to-value ratio on this lower amount. You’ll have to come up with the difference between the required down payment, your allowed loan amount, and the actual purchase price.
It’s important to understand that any money the seller provides cannot be used for the down payment. All funds for the down payment must be your own funds or those of someone gifting you the funds. Again, you’ll need to prove the source in order to meet the FHA’s and your lender’s guidelines.