So many people don’t have a ton of cash available to purchase a home. Because of that, FHA is a perfect program! FHA only requires 3.5% in down-payment – and they allow for a gift for ALL of the down payment! In addition, many of the FHA Borrowers that we work with ask the Sellers to pay most of their Closing Costs. This is also allowable, but the FHA Seller Paid Closing Costs Guidelines are very specific, and if they are not explained clearly, there can be some last-minute surprises if the Borrower doesn’t understand those guidelines!
FHA is generous in allowing a complete gift for the down payment AND the Closing Costs can come from a Family member, an Employer, a Non Profit, or a State Bonded Program like NCHFA here in North Carolina. Now that Real Estate Agents are refunding parts of their Commissions to Buyers, you need to remember that this money is not allowable in calculating the money you will need for your down payment or closing costs…
There are also First Time Home Buyer Grants that can also contribute up to 5% for Down Payment AND Closing Costs. This program is NOT available through Banks, but it IS a program we can help with. The best part is that you do NOT have to be a first time home buyer to qualify… the requirement is that you must have rented for at least the last 36 months.
How Seller Paid Closing Costs Work
FHA will not allow a Seller, or a Builder to contribute ANY money towards Down payment, 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 we rarely see the Seller actually pay ALL of the Buyers Closing Costs.
In reality what normally happens is the Seller raises the agreed upon Selling Price by the amount of the Closing Costs that they will be contributing. SO if the seller is asking $220,000 for the home, and you settle on a price of $216,000 and you want the Seller to pay $5000 in closing costs… then the final sales price will normally be $221,000 with the Seller paying a maximum of $5,000 in closing costs. Did we mention that we REALLY suggest that ALL buyers work with a Real Estate Agent? These negotiations can be tricky, and here’s why…
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. Keep in mind that there are certain closing costs that FHA wants the Buyer to pay for.
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, we 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 easiest way to figure out what costs a buyer needs to pay is to look at the costs and fees paid before the closing
Possible items that maybe required to be paid before of the Closing are:
- Appraisal Fee
- Home Inspection 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 Homeowners Insurance is in the list above, there is a way to include them into the costs that the Seller will contribute at the Closing. The same is true with the Home Inspection fee which is sometimes paid at closing.
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. It’s one of those “Golden Rules” (they have the Gold and THEY make the rules!). The thing to remember is that you will need SOME cash to be able to close on your loan – very few people can buy a house with NO cost. In addition to the Closing Costs and Down Payment, it’s also a good idea to understand how Earnest Money works.
If you have questions about buying a home in Cary, or how to work out FHA Seller Paid Closing Costs, please call Steve and Eleanor Thorne 919 649 5058, we do tons of FHA loans, we understand all of the qualifying guidelines, and we’d love to help you buy your home in North Carolina!