FHA Mortgage Definition Game

by Peter G. Miller
June 5th, 2007

There’s a great oddity with FHA downpayment requirements.

On one hand, the FHA says you need 3 percent down. That money must come from you but help from a relative, employer, union or charity is okay. What’s not okay is a down payment credit from the seller.

On the other hand, the FHA says an owner can make a seller contribution to reduce closing costs of as much as 6 percent of the sale price.

Let’s see: If you want to buy a $150,000 home with an FHA mortgage you’ll need $4,500 down (3 percent of the sale price). The seller can’t give you a dime for the down payment but can give you up to $9,000 (6 percent of the sale price) for closing costs.

Why would it be so terrible if a seller contributed $4,500 for closing costs and $4,500 for a downpayment? The seller concession would still be $9,000?

It may be that HUD is worried that prices will be raised beyond justifiable values so that buyers can purchase with no money down. But how is allowing a 6 percent “seller contribution” not an equal worry? In either case, there’s an appraisal to determine fair market value.

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