Sellers are able to help you with a variety of costs when buying a home. One thing they cannot help with, however, is the down payment. Helping with the money to put down on a home is considered an inducement to purchase. Generally, lenders require sellers to have an arm’s length relationship when it comes to buying a home.
Why Sellers Cannot Help With the Down Payment
There is a major difference between sellers’ concessions and sellers helping with a down payment. When sellers help with a down payment, it is similar to a bribe to encourage you to buy the home. The technical term is ‘inducement to purchase.’ In other words, they try to encourage you to buy the home by making you a deal you cannot resist.
What are Seller Concessions?
There is a way sellers can help you, though. It’s called sellers’ concessions. Most programs limit you to 6% of the purchase price of the home. For example, let’s say you buy a home for $200,000. A seller may contribute up to $12,000 to help with closing costs – not the down payment. The down payment can only come from you or a gift from an acceptable source (see below).
Seller concessions might sound like a great deal, though. A seller will pay your closing costs for you. That means you have to come up with less money at the closing. There’s a catch, though. Technically, you are paying the closing costs. Here’s how it works:
You bid on a home, offering the seller $190,000. He accepts the bid. But then, you decide you want help with the closing costs because you know they are going to cost you $10,000. Rather than coming up with the $10,000, you ask the seller to cover them for you. The seller agrees by raising the agreed upon sales price to $200,000 rather than $190,000. Now when you apply for financing, you will get financing for $200,000 minus your down payment. The seller will receive $200,000 and will give you the $10,000 to cover your closing costs.
As you can see, you are just increasing your loan amount in order for the seller to ‘pay’ your closing costs. In exchange for help with the closing costs, you pay a higher monthly mortgage payment and more interest over the life of the loan.
Getting Help With the Down Payment
Just because the seller cannot help you with the down payment doesn’t mean that there isn’t help elsewhere. Most loan programs, including FHA and conventional loans allow the use of gift funds. These are funds you receive from someone that is not tied to the sale of the home. The usual donors include relatives, employers, and charitable organizations.
FHA loans, for example, allow a donor to provide the entire down payment. You don’t have to put in any of your own money. However, you must be able to prove that the money is a gift. The donor must go through the process of writing a Gift Letter, which states that the money is a gift, no repayment is expected, and the purpose for the gift.
The donor and you will also have to make sure you track the origination of the fund. In other words, the lender needs to see a paper trail. If the donor gets the funds from his checking account, a copy of the check and the latest bank statement should suffice. If, however, the donor sells a stock or other asset to give you the money, they must provide the Bill of Sale, receipt of the funds, and proof of the check written to you.
Once you have the money, you must deposit every penny directly into the account you will use for any other funds tied to the home. You must provide the lender with the deposit ticket and account statement showing the funds in the account.
There is a large difference between helping with closing costs and helping with the down payment. It’s a very fine line you will walk if you need help with your loan. Before you accept any assistance, talk with your lender, especially if the seller is involved at all. You don’t want the lender or the investor to think there is any type of inducement to purchase. If it’s all done right and with open communication, though, you can get the help you need to buy a home.