Due to the housing market corrections that began in 2007, the Federal Housing Administration (FHA) altered the rules on the longstanding practice of third-party payment assistance in October 2008. The FHA determined that keeping seller donations at 6 per cent, while curtailing using down payment assistance programs, would allow buyers to get the assistance from sellers which they could desire while still requiring buyers to possess necessary equity in their property. This made seller donations more significant than ever.
History
Prior to this change, the FHA and lenders allowed sellers to contribute the required 3 percent down payment plus a small fee to down payment support programs such as Nehemiah, which then paid 3 percent outside at closure as a gift toward the purchaser’s down payment. These transactions became commonplace in many locations and negated the purpose of requiring a down payment by the purchaser. A number of these transactions were possible since the purchaser would bump up the contracted sales price over the asking price by the three percent, leaving the seller’s internet unchanged. This had the effect of artificially bumping up evaluation values across the country and removing the equity buyers had in their houses. Without equity, there was nothing keeping them in their houses when finances got tough, and the FHA began experiencing record foreclosure levels. This drained the FHA book funds and crippled the app, but the fact remained that a few buyers still wanted help.
Identification
The FHA defines seller gifts as gifts made by an interested third party. This can include sellers, real estate agents, builders or even a combination of those three. These donations may be used for a number of set purposes, but may not be directly or indirectly used for down payment assistance. Down payment money can’t come from an interested third party. This makes seller gifts a valuable instrument in making homeownership affordable for buyers.
Function
Buyers can use seller gifts to pay for closing costs, prepaids (for example, homeowner’s insurance and association fees), discount points, temporary speed buydowns, upfront mortgage insurance premium (MIP) or upfront interestrates If seller gifts run more than 6 per cent, the lender deducts the overage from the property sales price before the application of the 96.5 percent loan-to-value principle, which reduces the available loan amount and raises the mandatory down payment.
Outcomes
In the event the buyer was planning to use savings to pay for closing costs, discount points or rate buydowns, this usually means that the money could apply to some down payment instead. For instance, say you wanted to buy a home listed at $100,000 and had $4,000 in money saved. You actually wanted to maintain your payment under a certain dollar amount, so your lender suggested paying discount points to lower your interest rate and make your payment less expensive. You cannot afford to cover points and your down payment at closing, so your agent requests the seller to cover part or all of the discount points and closing costs in your offer instead of requesting a reduced price of $97,500. The seller receives the exact same web as the $97,500 offer and you receive the points you need while still maintaining the money you need to pay the whole down payment.
Benefits
Buyers can also use seller gifts to pay for prepaid costs, mortgage interest or temporary rate buydowns. This means that if you have cash in savings you have to keep –say you are pregnant and saving up to buy furniture for a nursery–you can ask the seller to pay for a 1 to 2 percent interest rate reduction for annually or two prepay your curiosity, homeowner’s association fees or homeowner’s insurance for a specified period. That would give you the time to replenish your savings account for the money you employed at closing and keep your 3.5 percent equity investment in the property.