FHA financing requires a 3.5% down payment but it doesn’t have to come from your own money. In many cases, the FHA allows you to get help from a third party. But can the seller be one of them?
Unfortunately, the seller cannot help with your down payment. The FHA considers it a conflict of interest or inducement to purchase. If the seller pays your down payment it’s almost like they are bribing you to buy the home. The only people your down payment can come from is you, a family member, or your employer.
What Can a Seller Pay?
When you negotiate the price of a house, you can negotiate seller concessions as a part of the sale. Seller concessions are money the seller is willing to give you at the closing to cover your costs on the loan. Sellers can help with closing fees that includes:
- Origination fee
- Discount points
- Appraisal fees
- Title fees
The Limit on Seller Concessions
Just because sellers can help you with your costs doesn’t mean they can cover everything. They can only provide you with up to 6% of the sales price of the home. Typically, this should be more than enough to cover your closing costs and even your upfront mortgage insurance. Depending on where you live, closing costs can cost between 3% and 6% of the loan amount.
The seller can only provide funds that cover an actual cost. For example, if the seller covers more than your closing costs, you can use the other funds to cover your FHA upfront mortgage insurance fee or your real estate taxes. You cannot keep any money for yourself and you cannot use the funds for your down payment.
Exceeding the 6% Rule
So what happens if the seller provides you with more than 6% of the loan amount? The good news is that you won’t’ lose your loan approval. The bad news is that the lender will decrease the property’s price. For every dollar that you are over the 6% rule, you’ll lose a dollar of the purchase price, which in turn affects your loan amount. For example, if you receive $1,000 more than the 6% maximum, you’d lose $1,000 in your property’s price, which would decrease your loan amount since the FHA will only allow a 97.5% LTV.
Other Ways to Get Help With Your Down Payment
Even though the seller can’t help with your down payment, you can get help from others. Typically, the person helping you must have an arm’s length distance from the transaction. In other words, the contributor can’t have any interest in the property or sale of the property. This includes the seller, any real estate agents, or other interested parties.
Anyone without an interest in the property but with a relationship to you may qualify. The most common people include family members, such as parents, or employers. Whoever decides to contribute to your purchase will need to write a gift letter. This letter should state the amount of the gift provided, the reason for the gift, and that it is not a loan or no repayment is expected.
While the seller can’t pay the down payment for your home, there are other ways the seller can help you. If you can make the down payment and then get help from the seller for your closing costs, you could be in good shape. If you can’t make the down payment, you can try to get help from others while still getting help from the seller with the closing costs.