June 30, 2022

FHA Caps On Borrower Closing Costs Paid By Sellers

One of the benefits of FHA financing is the ability of home buyers to have the seller pay for certain closing costs.

The FHA allows sellers to pay specified closing costs, subject to a percentage limitation, on behalf of borrowers.  The ability of home buyers to obtain seller concessions is one of the major benefits of FHA financing since it can significantly reduce the amount of cash needed by a borrower at closing.

The FHA has a limitation on the amount of closing costs that can be paid by sellers on behalf of borrowers.  There are also restrictions on the type of closing costs that can be paid by sellers.

The maximum amount of seller concessions allowed by the FHA is 6% of the property’s selling price.  Besides the seller, other parties to the transaction such as builders, developers or real estate agents can also pay for certain closing costs, up to the 6% maximum.  Contributions to closing costs, or seller concessions, may include prepaid expenses, discount points and other financing seller concessions.  Included in the 6% limitation calculation are seller paid items such as any payment for a rate buydown, mortgage interest payments, payment of the upfront mortgage insurance premium and payment protection insurance.

Closing costs that are normally paid for by the seller such as real estate commissions cannot be considered as seller contributions.

If contributions exceed the 6% FHA limit, the excess amount is considered a sales incentive to purchase and will be reduced from the amount of the mortgage.   Contributions in excess of 6% must be subtracted from the sale price of the property.  This reduction from the sales price will result in a lower loan to value calculation for loan purposes, thus reducing the allowable loan amount.  Typically, most seller contributions are limited to 6% in a purchase transaction.

The generous 6% allowance for seller paid closing costs on an FHA loan allows has made it much easier for borrowers to purchase a home.  The 6% seller concessions will normally cover most or all of a borrower’s closing costs.  In this situation, a borrower would only have to come up with a 3.5% downpayment, which on a $100,000 purchase is only $3,500.