Recently a manager requested clarification regarding seller contributions and/or concessions to a buyer as part of a transaction.  I have outlined some basic do's and don'ts below.  Please let me know if you have any questions.

 First and foremost, the most basic rule is that a buyer may not receive cash back from the seller as part of the transaction.  This would include a seller writing a buyer a check after closing and/or a seller endorsing a check to the buyer that the seller received from the title company .   Any and all financial arrangements between the buyer and seller must appear on the HUD statement and the lender must be aware of the terms.  I would always recommend that any  and all  financial terms of the purchase agreement be included  in either the body of the purchase agreement and/or the financing addendum.  I do not recommend including financial terms on a "blank" addendum.

 Second, different financing programs have different limitations on the maximum  amount a seller may contribute to a buyer in a transaction.  The maximum contributions are calculated on value which is the lesser of either the sale price or appraised value.  For example:

 VA - maximum seller contribution is 4% plus any additional seller contribution for true discount points.

 FHA - maximum seller contribution is 6%, however, the buyer must have at least a 3% personal contribution.  Typically an FHA buyer is only required to pay a 2 1/4% down payment plus closing costs.  If the seller contributes enough money to cover all of the buyer closing costs, the buyer would then be required to increase their down payment to 3% (the net result is a decrease in the maximum mortgage amount).

 Conventional -  maximum seller contributions are based on the following sliding scale:

 Less than 10% down - maximum seller contribution is 3%

10% - less than 25% down - maximum seller contribution is 6%

More than 25% down - maximum seller contribution is 9% 

Based on the above-referenced limitations for all types of financing, the seller may not under any circumstances contribute more than the maximum allowed.   That maximum would include all contributions including, but not limited to, closing costs, points and/or other contributions such as repair items. 

Third, as indicated above, maximum seller contributions include negotiated items in the purchase agreement.  For example, if prior to closing  the buyer discovers a defect  in the property, and requests that the seller contributes to the repair, the buyer has the following options:

1.  Secure a bid and/or negotiate an amount with the seller and escrow the  money at closing.

2.  Re-negotiate the purchase price.

3.  Have the seller contribute the negotiated amount towards the buyer's closing costs.  Please note that this option is only available if the seller has not already agreed to contribute the maximum  amount allowed as referenced above. 

It is not acceptable for the seller to simply pay the buyer money towards any item.  In addition, if  the buyer and seller either agree to escrow money, agree to a reduction in price or agree to that the seller will pay a portion of the buyer's closing costs, the underwriter is required to approve the agreement.

 Fourth, managers and sale associates also need to keep in mind that many of the "lenders" in the marketplace are not the true investor but rather they are simply a loan broker.  That means the ultimate decision maker is the investor that will at some point purchase the loan from the loan broker.  Therefore, if the "lender" is encouraging an agent and/or the parties to structure a transaction that would in fact violate some of the guidelines I have mentioned  above, please contact the legal department.

As a last note, FHA recently released two new guidelines involving the re-sale of a property using FHA financing. Specifically, the guidelines are:

1.  FHA financing may not be used to purchase a property that has been sold in the last 90 days.

2.  FHA financing may not be used to purchase a property that has been sold in the last  90-180 days if the new sale price is more than 100% greater than the previous sale price.

I have also listed below some of the more obvious "red flags" in a transaction.

Inflated sale price over list price without multiple offers

"Refund" of money back to the buyer from seller after closing

"Forgiveness" of a second mortgage from buyer to seller after closing"decorating allowances"

 If you receive a purchase agreement on one of your listings with one or more red flag, please feel free to contact the legal department.