FHA Guideline On Seller Paid Closing Costs

By
Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages Connecticut NMLS #65149
http://actvra.in/FZ9

These days many of the FHA Borrowers that I work with require Sellers to pay most of their Closing Costs, so I need to be on top of what the FHA Guideline On Seller Paid Closing Costs are. The FHA Guideline On Seller Paid Closing Costs are very specific, but could cause some last minute surprises if not explained correctly, and understood by the Borrower.

FHA does not require that a Buyer put any of his or her own money towards Downpayment and/or Closing Cost.  All of the money for Downpayment and Closing Costs can come from an acceptable gift source such as a:

  • Family member
  • Employer
  • Non Profit
  • State Bonded Program like CHFA in Connecticut

FHA will not allow a Seller to contribute ANY money towards Downpayment, but they will allow the Seller to contribute up to 6% of the Sales Price towards the Buyers Closing Costs.  This sounds good and it is, but I rarely see the Seller actually pay the Buyers Closing Costs.  In reality what happens is the Seller raises the agreed upon Selling Price by the amount of the Closing Costs that they will be contributing.

This means that even though the Buyer can receive up to 6% towards Closing Costs, they should not request any more than the actual amount of Closing Costs that the Seller will be allowed to pay at the Closing.  If the Buyer asks for more money than the Seller will be allowed to contribute towards Closing Cost, the Seller gets to keep the difference, and the Buyer ends up paying more for the house than they needed to.  This means that before a Buyer or their Realtor asks for Seller Paid Closing Costs, they need to talk to their Loan Originator, and have him or her give them a very close estimate of what the Total Closing Cost will actually be.

In figuring the Estimated Closing Costs, the Loan Originator will need to take into account the Closing Cost that FHA will not allow the Seller to pay, and subtract them from the Total Closing Cost Estimate.  The Closing Costs the will need to be deducted from the Total Closing Costs are any Closing Costs that are paid before the Closing.  Those will include any fees paid to the Lender or other vendors prior to the Closing.

Possible items that maybe required to be paid before of the Closing are:

  • Appraisal Fee
  • Application Fee
  • Condo Questionnaire
  • Homeowners Insurance

There are other fees that could possibly be required to be paid before the Closing, but these are the most common ones.  However, even though I have included Homeowners Insurance in the list above, there is away to include them into the costs that the Seller will contribute at the Closing.

All Lenders will require that the Borrower obtain an insurance binder before the Closing, but they do not require that the premium be paid prior to the Closing as long as a check will be sent to the insurance company at the time of the Closing.  However, some insurance companies will not issue the insurance binder without a payment, so what I advise my Borrowers to do in that case is to just pay them one month premium, and the other 11 months paid at the Closing.  That way they can maximize the funds that that they can receive from the Seller, and reduce their out of pocket cost.

I have heard of angry Buyers that did not find out until the Closing that they could not be reimbursed for the items that they paid before the Closing.  That is not the type of surprise that anyone wants at the last minute.  I make sure that my Borrowers understand this when I am Pre-Qualifying them, when I am doing the Mortgage Application with them, and after the loan is approved and they are now going to shop for Homeowners Insurance.  I want them to take advantage of ALL the funds that the Seller has agreed to contribute, and I don't want an agree phone call from my Borrowers after the Closing.

This is something that can not be explained enough, and should be reinforced at every appropriate opportunity.  FHA Guideline On Seller Paid Closing Costs are very clear, and need to be followed, because FHA does not provide any flexibility when it comes to this issue.

 

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Who To Call For Your Mortgage Needs In Connecticut:

George Souto NMLS# 65149 is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308  gsouto@mccuemortgage.com, or visit my McCue Mortgage Homepage

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Re-Blogged 17 times:

Re-Blogged By Re-Blogged At
  1. Lenn Harley 08/07/2012 03:46 AM
  2. Stephen Howell 08/07/2012 05:21 AM
  3. Susanna Haynie 08/07/2012 05:04 PM
  4. Shelly Sierra 08/08/2012 06:03 AM
  5. Bob Southard 08/08/2012 06:36 AM
  6. Valerie Osterhoudt 08/08/2012 07:17 AM
  7. Debbe Perry 08/08/2012 07:27 AM
  8. Dennis J. Zisa 08/08/2012 07:29 AM
  9. Michael Steber 08/08/2012 08:15 AM
  10. Suzanne McLaughlin 08/08/2012 11:28 AM
  11. Gene Riemenschneider 08/10/2012 03:47 PM
  12. Gabe Sanders 08/13/2012 03:27 AM
  13. Curt Hess 08/13/2012 03:37 PM
  14. Randy Elgin 08/17/2012 10:53 AM
  15. Joy Carter & Jeff Booker Brother and Sister Team 08/18/2012 08:16 PM
  16. Winston Heverly 12/27/2012 05:45 AM
  17. Steve Gronlund 02/08/2013 01:26 PM
Topic:
Lending / Financial
Location:
Connecticut
Groups:
Real Estate Rookie
Realtors®
Mortgages
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1st Time Buyers
Tags:
seller paid closing costs

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Rainmaker
277,359
Travis "the SOLD man" Parker; Associate Broker
Team Linda Simmons, Enterprise, AL 36330 - Enterprise, AL
email: Travis@theSOLDman.me / cell: 334-494-7846

THANK YOU!! I hope you don't mind if I copy this a a quick reference when I need it.

 

Aug 08, 2012 11:20 AM #78
Ambassador
853,566
Suzanne McLaughlin
Sabinske & Associates, Inc. (Albertville, St. Michael) - Saint Michael, MN
Sabinske & Associates, Realtor

What a well-written post.  And, this is great information to send to clients.  Thanks.

Aug 08, 2012 11:26 AM #79
Rainer
207,675
Nan Jester
Exit Real Estate Gallery Jacksonville Beach, FL - Jacksonville Beach, FL
Realtor, Exit Real Estate Gallery

Thanks for the refresher.  It is always changing so let us all beware.

Aug 08, 2012 12:12 PM #80
Rainmaker
723,608
Barbara S. Duncan
RE/MAX Advantage - Searcy, AR
CRS, GRI, e-PRO, Searcy AR

Our lenders like to get paid for the appraisal up front so that if the deal falls through, they have the money.  I was not aware that this could not be reimbursed or credited on the final closing statement.  Guess I'm out of touch.

Aug 08, 2012 12:44 PM #81
Rainmaker
1,215,617
John Pusa
Sellstate Pacific Realty - Glendale, CA
Your All Time Realtor With Exceptional Service

George - Thanks for the list of detailed information about FHA guideline on seller paid closing costs.

Aug 08, 2012 01:19 PM #82
Rainer
76,028
Arpad Racz
Altas Realty - Cupertino, CA
408-371-8288 - www.aracz.com - Cupertino and Bay A

Thank you George!

 

All the best,

 

Arpad

 

 

Aug 08, 2012 01:46 PM #83
Rainer
58,940
Charles Walk

Great post... thanks for sharing.

Aug 08, 2012 03:20 PM #84
Rainer
6,500
unknown unknown
Greer, AZ

Great information! Thanks!

Aug 08, 2012 06:06 PM #85
Rainmaker
820,592
Lyn Sims
RE/MAX Suburban - Schaumburg IL Real Estate - Northwest Suburbs of Chicago - Schaumburg, IL
Schaumburg Homes

Good post & good thought about the purchase price increase over & above the actual closing costs. You either know what you are doing or you don't during negotiations. Many buyers agents try to do their buyers a favor by getting as much as possible & in the end the buyer is not ahead. 

Aug 08, 2012 06:25 PM #86
Rainmaker
172,589
Kate McQueen, SRS
KELLER WILLIAMS REALTY CLEAR LAKE NASA - League City, TX
Houston Bay Area Real Estate

All find and good if both parties are in agreement with stacking closing costs on contract price.....that is if the appraisal comes in with a value to support it.  

Aug 09, 2012 06:58 AM #87
Rainer
102,643
Korby Matsen
Premiere Team Real Estate - Austin, TX
Premiere Team Real Estate (512)699-6262

I'm not sure about other states, but in the paragraph of the Texas contract that refers to Seller paid expenses, the verbage used is "Buyer Expenses as allowed by the lender". So if the amount entered is higher than the allowed closing costs, the remaining amount can be used to pay other Buyer expenses, including the sale price of the house, which is a Buyer Expense. The Seller does not get to keep the remainder.

Aug 09, 2012 07:54 AM #88
Rainmaker
1,266,177
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

Good post on a tough subject.  The big problem around here is if you raise the price to cover the credits it often does not appraise.

Aug 09, 2012 11:17 AM #89
Rainer
9,248
Todd Johnson
Century 21 Wright - Temecula, CA
Broker to the Boomers!
Great refresher from the field. Thanks!
Aug 09, 2012 11:15 PM #90
Rainmaker
72,521
Karen Deis
ApartmentToolKit.com - Minneapolis, MN
When In-house training is not enough!

Thanks for the explanation.  Even negotiating paying a portion of the buyer's closing costs (instead of lowering the price) will help--say $3,000 flat fee.

Aug 10, 2012 06:26 AM #91
Rainer
122,144
Roger Newton
Roger Newton Real Estate - North Plains, OR

I received this yesterday printed on the lender approval leter with an offer on a listing of mine:

 

Notes:  Due to HERA/MDIA regulations instated no 7/30/09, closing dates will need to remain flexible.  The regulation mandates that certain waiting periods potentially be observed prior to ordering appraisals, issueing loan docs and closing loans.  Our predictibility and control of the causes of any of these potential waiting periods is quire limited, and thus, we are unable to ensure closing on any certain date, though we always strive to acheieve timely closings. Please ask me for a copy of the regulations if you would like to understand the specifics.

 

As an experienced loan officer, wouldn't you know how long and when the waiting periods are, so that you would know how long it should take to close a loan???  This seems like a cop out to me.

Aug 11, 2012 08:10 AM #92
Rainmaker
67,494
Richard D. Ferris
AmcAppraisalsinc.com - Clermont, FL
Florida State Certified (FHA) Appraiser

Great point about leaving money on the table with this process!  How many buyers think they will get that full 6% off the price of the home on the back end, only to see it is actually 4% - and the seller gets a 2% bump!

The harder issue, is what happens when the appraisal value does not match the new sale price - now 6% higher than list price?  Who pays then?  

Aug 13, 2012 10:27 AM #93
Rainer
180,597
Randy Elgin
Keller Williams, San Antonio, Helotes, Leon Valley - San Antonio, TX
Sells Affordable Homes for sale in the San Antonio

thanks for a very concise post about FHA loans. I've reblogged this. thank you.

Aug 17, 2012 10:54 AM #94
Rainmaker
192,173
Joy Carter & Jeff Booker Brother and Sister Team
Keller Williams Partners Realty-GreatFloridaHomes Team - Plantation, FL
Trust Your Family's Move To Our Expertise!

Certainly worthy of a RE-BLOG.  Thanks for the details.  Joy

Aug 18, 2012 08:17 PM #95
Rainer
162,296
Bahman Davani, CM Broker/REALTOR at Texas Five Star Realty, Plano, TX (214) 457-7055
Texas Five Star Realty, Plano Texas - Frisco, TX
Homes for Sale in Plano, Frisco, Prosper, Allen TX

very usefull information. Thanks.

Jan 15, 2013 09:08 PM #96
Rainmaker
336,989
Inna Ivchenko
Mannis Real Estate Group - Calabasas, CA
Los Angeles / Valley Homes

I've never had them pay 6%( would be very helpful to first time buyers), and appraiser is usually charging upfront these days( here the fee is 400-650$)

Sep 01, 2013 01:54 AM #97
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