Can a Seller Pay the Down Payment on an FHA Loan?

Federal Housing Administration (FHA) loans make homeownership more accessible by offering mortgage insurance on loans from FHA-approved lenders. The down payment is a crucial part of purchasing a home, representing a portion of the home’s purchase price paid upfront by the buyer. For prospective homeowners, understanding the requirements and acceptable sources for this initial investment, especially when external contributions are involved, is a key step in the homebuying process.

Understanding FHA Down Payments

FHA loans feature specific minimum down payment requirements designed to assist a broad range of borrowers. For those with a FICO credit score of 580 or higher, the minimum down payment is 3.5% of the home’s purchase price. Borrowers with credit scores between 500 and 579 must make a 10% down payment.

These funds must come from acceptable sources to ensure the buyer has a vested interest. Approved sources include the buyer’s own savings or checking accounts, retirement accounts (such as 401(k)s or IRAs), or the liquidation of stocks and bonds. Gift funds from approved donors, like family members, employers, or charitable organizations, are also allowed, provided documentation confirms they are a true gift with no expectation of repayment.

Seller Contributions on FHA Loans

While FHA loans offer flexibility in down payment sources, there is a clear regulation regarding direct contributions from the seller. FHA guidelines state that sellers, or any other interested parties in the transaction, are not permitted to directly pay or contribute to the buyer’s minimum required down payment. This restriction is in place because the FHA views such direct payments as a risk factor and a potential “inducement to purchase,” aiming to ensure the buyer’s genuine financial commitment to the property.

Any financial assistance provided by the seller in an FHA loan transaction falls under the category of “interested party contributions” or “seller concessions.” These contributions cannot be applied towards the down payment. Instead, they are intended to help alleviate other costs associated with the home purchase, indirectly benefiting the buyer by freeing up their personal funds for the down payment.

Permitted Uses of Seller Contributions

Seller contributions, also known as “seller concessions,” cannot fund the down payment directly but can cover various other expenses in an FHA loan transaction. This indirect assistance can significantly reduce the cash a buyer needs at closing.

Seller contributions can cover:
Loan origination fees
Appraisal fees
Title insurance
Recording fees
Attorney fees
Prepaid expenses, such as property taxes and homeowner’s insurance
Discount points, which reduce the loan’s interest rate
Upfront mortgage insurance premium (UFMIP) required on FHA loans

Limitations on Seller Contributions

FHA regulations impose a limit on the total amount of seller contributions allowed in a transaction. Sellers, along with other interested parties, can contribute up to 6% of the lesser of the sales price or the appraised value of the home. This cap ensures that seller concessions do not inflate property values or create an excessive inducement for the buyer.

If seller contributions exceed this 6% limit, the excess amount cannot be used. FHA rules mandate a dollar-for-dollar reduction in the loan amount. This means any contributions beyond the permissible 6% directly decrease the amount the buyer can borrow. Buyers and sellers should be aware of these limitations to ensure compliance.