Summary: The excitement of a new home purchase can sometimes override wisdom and prudence when…
Summary: Under current HUD guidelines, sellers can pay money toward a home buyer’s closing costs, when an FHA loan is being used. These seller contributions are typically limited to 6% of the purchase price.
FHA loans are a popular mortgage option among home buyers in Oregon. They’re especially popular among first-time buyers and/or those with limited funds for a down payment. One of the benefits of the FHA loan program is that it allows the seller to contribute money toward the buyer’s closing costs. This kind of “concession” is often made to attract buyers and offers, thereby expediting the sale of the property.
Here’s an overview of the rules and requirements when a seller pays for a buyer’s FHA closing costs in Oregon.
Sellers Can Pay Some of the Buyer’s FHA Costs
The FHA loan program is managed by the Department of Housing and Urban Development (HUD). So it is HUD that sets the guidelines for seller contributions toward closing costs.
In the Single Family Housing Policy Handbook (HUD Handbook 4000.1) that covers the FHA loan program, it talks about “interested parties.” These are people who are involved with the real estate transaction, but are still allowed to contribute money toward the buyer’s closing costs.
HUD defines an interested party as being: “sellers, real estate agents, builders, developers or other parties with an interest in the transaction.”
The handbook further states that these interested parties can contribute money “toward the Borrower’s origination fees, other closing costs and discount points.” These contributions are generally limited to 6% of the sales price.
So yes, in Oregon a seller can pay some of the home buyer’s closing costs when an FHA loan is being used. But these “interested party contributions” are typically capped at 6% of the purchase price.
A contribution that exceeds 6% would be considered an “inducement to purchase” and would result in a dollar-for-dollar reduction to the purchase price when computing the Adjusted Value. As such, seller contributions that exceed 6% do not happen very often. In most cases, these contributions fall at or below the 6% cap.
But Not the Down Payment…
Oregon home buyers who use an FHA loan to buy a house must make a down payment of at least 3.5% of the purchase price or appraised value. HUD refers to this as the minimum required investment, or MRI.
The FHA handbook states that “Interested Party Contributions may not be used for the Borrower’s MRI.” And you’ll recall from earlier that the person who is selling the home is considered an interested party.
This means that in Oregon (and nationwide) the seller cannot contribute money to the home buyer’s down payment, when an FHA is used to finance the purchase.
Ask Yourself: What’s the Real Estate Market Like?
It’s important to distinguish that HUD allows home sellers in Oregon to contribute toward the buyer’s FHA closing costs — but they do not require it. Seller concessions and contributions are typically agreed upon during the negotiation process, prior to closing.
Generally speaking, sellers tend to be more willing to pay buyer closing costs in a slower real estate market, and less inclined to do so in a hot market with competing offers. In fact, in a sluggish market you’ll often see real estate yard signs that say things like “seller pays closing costs.” This is an enticement to attract more offers, which might be necessary in a buyer’s market.
In an active and highly competitive housing market, however, this kind of offer is less common. That doesn’t mean buyers can’t ask for the seller to pay some or all of their closing costs. It just means that the current state of the market will affect their willingness to do so. So when it doubt, rely on your real estate agent’s advice.
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